Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and
smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated
filer þ

Accelerated
filer o

Non-accelerated
Filer o

Small reporting
company o

(Do
not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ

The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of June 30,
2007 was approximately $1.25 billion based upon the closing
price reported for such date on The Nasdaq Global Select Market.
For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by officers and directors of the
Registrant have been excluded because such persons may be deemed
to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of outstanding shares of the Registrants Common
Stock, $.001 par value, was 105,330,070 as of
January 31, 2008.

Certain information is incorporated into Part III of this
report by reference to the Proxy Statement for the
Registrants annual meeting of stockholders to be held on
May 9, 2008 to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Form 10-K.

This Annual Report on
Form 10-K
(Annual Report) contains forward-looking statements. These
forward-looking statements include, without limitation,
predictions regarding the following aspects of our future:



Outcome and effect of current and potential future intellectual
property litigation;



Litigation expenses;



Resolution of the Federal Trade Commission and European
Commission matters involving us;



Protection of intellectual property;



Amounts owed under licensing agreements;



Terms of our licenses;



Indemnification and technical support obligations;



Success in the markets of our or our licensees products;



Research and development costs and improvements in technology;



Sources, amounts and concentration of revenue, including
royalties;



Effective tax rates;



Realization of deferred tax assets;



Product development;



Sources of competition;



Pricing policies of our licensees;



Success in renewing license agreements;



Operating results;



International licenses and operations, including our design
facility in Bangalore, India;

You can identify these and other forward-looking statements by
the use of words such as may, future,
shall, should, expects,
plans, anticipates,
believes, estimates,
predicts, intends,
potential, continue, or the negative of
such terms, or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating
to any of the foregoing statements.

Actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including those set forth under Item 1A, Risk
Factors. All forward-looking statements included in this
document are based on our assessment of information available to
us at this time. We assume no obligation to update any
forward-looking statements.

Rambus, RDRAM, XDR, FlexIO and FlexPhase are trademarks or
registered trademarks of Rambus Inc. Other trademarks that may
be mentioned in this annual report on
Form 10-K
are the property of their respective owners.

Industry terminology, used widely throughout this annual report,
has been abbreviated and, as such, these abbreviations are
defined below for your convenience:

Advanced Backplane

ABP

Double Data Rate

DDR

Dynamic Random Access Memory

DRAM

Fully Buffered-Dual Inline Memory Module

FB-DIMM

Gigabits per second

Gb/s

Graphics Double Data Rate

GDDR

Input/Output

I/O

Peripheral Component Interconnect

PCI

Rambus Dynamic Random Access Memory

RDRAM

Single Data Rate

SDR

Synchronous Dynamic Random Access Memory

SDRAM

eXtreme Data Rate

XDR

From time to time we will refer to the abbreviated names of
certain entities and, as such, have provided a chart to indicate
the full names of those entities for your convenience.

Rambus Inc. (we or Rambus) was founded
in 1990 and reincorporated in Delaware in March 1997. Our
principal executive offices are located at 4440 El Camino Real,
Los Altos, California. Our Internet address is www.rambus.com.
You can obtain copies of our
Forms 10-K,10-Q,8-K, and
other filings with the SEC, and all amendments to these filings,
free of charge from our website as soon as reasonably
practicable following our filing of any of these reports with
the SEC. In addition, you may read and copy any material we file
with the SEC at the SECs Public Reference Room at
100 F Street, NE, Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports,
proxy, and information statements, and other information
regarding registrants that file electronically with the SEC at
www.sec.gov.

We design, develop and license chip interface technologies and
architectures that are foundational to nearly all digital
electronics products. Our chip interface technologies are
designed to improve the
time-to-market,
performance and cost-effectiveness of our customers
semiconductor and system products for computing, communications
and consumer electronics applications.

As of December 31, 2007, our year end, our chip interface
technologies are covered by more than 680 U.S. and foreign
patents. Additionally, we have approximately 540 patent
applications pending. These patents and patent applications
cover important inventions in memory and logic chip interfaces,
in addition to other technologies. We believe that our chip
interface technologies provide a higher performance, lower risk,
and more cost-effective alternative for our customers than can
be achieved through their own internal research and development
efforts.

We offer our customers two alternatives for using our chip
interface technologies in their products:

First, we license our broad portfolio of patented inventions to
semiconductor and system companies who use these inventions in
the development and manufacture of their own products. Such
licensing agreements may cover the license of part, or all, of
our patent portfolio. Patent license agreements are royalty
bearing.

Second, we develop leadership (which are
Rambus-proprietary products widely licensed to our customers)
and industry-standard chip interface products that we provide to
our customers under license for incorporation into their
semiconductor and system products. Because of the often complex
nature of implementing
state-of-the
art chip interface technology, we offer our customers a range of
engineering services to help them successfully integrate our
chip interface products into their semiconductors and systems.
Product license agreements may have both a fixed price
(non-recurring) component and ongoing royalties. Engineering
services are customarily bundled with our product licenses, and
are performed on a fixed price basis. Further, under product
licenses, our customers may

receive licenses to our patents necessary to implement the chip
interface in their products with specific rights and
restrictions to the applicable patents elaborated in their
individual contracts with us.

The performance of computers, consumer electronics and other
electronic systems is often constrained by the speed of data
transfer between the chips within the system. Ideally, the rate
of the data transfer between chips should support the rate of
data transfer on-chip. However, on-chip frequencies continue to
exceed the frequency of communication between chips at a growing
rate. The incorporation of multiple-cores in processor chips
drives an even greater need for higher rates of data transfer.
Further, the inability to scale packaging technology (number of
signal pins on a package) at the rate at which transistor counts
scale through improvements in semiconductor process technology
only worsens the chip interface bottleneck. As a
result, continued advances to increase on-chip frequencies,
number of cores or transistor densities face potentially
diminishing returns in increasing overall system performance.
Our technologies help semiconductor and system designers speed
the performance of chip interfaces, thus helping to boost the
overall performance of electronic systems.

We derive the majority of our annual revenues by licensing our
broad portfolio of patents for chip interfaces to our customers.
Such licenses may cover part or all of our patent portfolio.
Leading semiconductor and system companies such as AMD, Elpida,
Fujitsu, Qimonda, Intel, Matsushita, NECEL, Renesas, Spansion
and Toshiba have taken licenses to our patents for use in their
own products. Examples of the many patented innovations in our
portfolio include:

Fully Synchronous DRAM which is designed to allow precise
timing from a DRAM system, improving memory transfer efficiency.

Dual Edge Clocking which is designed to allow data to be
sent on both the leading and trailing edge of the clock pulse,
effectively doubling the transfer rate out of a memory core
without the need for higher system clock speeds.

Variable Burst Length which is designed to improve data
transfer efficiency by allowing varying amounts of data to be
sent per a memory read or write request in DRAMs and Flash
memory.

We license our leadership and industry-standard chip interface
products to our customers for use in their semiconductor and
system products. Our customers include leading companies such as
Fujitsu, Elpida, IBM, Intel, Matsushita, Texas Instruments,
Sony, ST Micro, Qimonda and Toshiba. Due to the complex nature
of implementing our technologies, we provide engineering
services under certain of these licenses to help successfully
integrate our chip interface products into their semiconductors
and systems. Additionally, product licensees receive, as an
adjunct to their chip interface license agreements, patent
licenses as necessary to implement the chip interface in their
products with specific rights and restrictions to the applicable
patents elaborated in their individual contracts.

The XDR Memory Architecture enables what we believe to be
the worlds fastest production DRAM with operation up to
6.4 Gb/s. XDR DRAM is the main memory solution for Sony Computer
Entertainments
PLAYSTATION®3
as well as for Texas Instruments latest generation of DLP
front projectors.

The XDR2 Memory Architecture incorporates new
innovations, including DRAM micro-threading, to deliver the
worlds highest performance for graphics intensive
applications such as gaming and digital video.

RDRAM Memory has shipped in the Sony
PlayStation®2,
Intel-based PCs, Texas Instruments DLP TVs and in Juniper
routers. Our customers have sold over 500 million RDRAM
devices across all applications to date. This product is
approaching
end-of-life,
and we anticipate revenues from RDRAM will continue to decline.

The FlexIO Processor Bus is a high speed
chip-to-chip
interface. It is one of our two key chip interface products that
enable the Cell BE processor co-developed by Sony, Toshiba and
IBM. In the
PLAYSTATION®3,
FlexIO provides the interface between the Cell BE, the RSX
graphics processor and the SouthBridge chip.

In addition to our leadership products, we offer
industry-standard chip interface products, including DDRx (where
the x is a number that represents a version) and PCI
Express. We also offer digital logic controllers for PCI Express
and DDRx memory.

We work with leading and emerging semiconductor and system
customers to enable their next-generation products. We engage
with our customers across the entire product life cycle, from
system architecture development, to chip design, to system
integration, to production ramp up through product maturation.
Our chip interface technologies and patented inventions are
incorporated into a broad range of high-volume applications in
the computing, consumer electronics and communications markets.
System level products that utilize our patented inventions
and/or
products include personal computers, servers, printers, video
projectors, video game consoles, digital TVs, set-top boxes and
mobile phones manufactured by such companies as Fujitsu, IBM,
Hewlett-Packard, Matsushita, Toshiba and Sony.

Engage With Leading Companies: Engage with
leading semiconductor and system customers to solve their
critical chip interface design problems and incorporate our high
performance, low-risk, silicon-proven chip interfaces into their
solutions.

License our Chip Interface Patents and
Technologies: License our patented inventions and
specific chip interface products to customers for use in their
semiconductor and system products.

Our chip interface technologies are developed with high-volume
complementary metal-oxide semiconductor (CMOS) manufacturing
processes in mind. Typically, our chip interface products are
delivered as an implementation package or a custom development.
We provide implementation packages to licensees who wish to port
our chip interface designs to a manufacturing process being used
to develop their semiconductor products. This package typically
includes a specification, a generalized circuit layout database
and test parameter software. We do custom development when
licensees have contracted with us to produce a specific design
implementation optimized for the licensees manufacturing
process. In such cases, the licensee provides specific design
rules and transistor models for the licensees process.

Our ability to compete in the future will be substantially
dependent on our ability to advance our chip interfaces and
patented inventions in order to meet changing market needs. To
this end, we have assembled a team of highly skilled engineers
whose activities are focused on further development of our chip
interfaces and patented inventions as well as adaptation of
current chip interfaces to specific customers processes.
Our engineers are developing new chip interfaces and new
versions of existing chip interfaces that we expect will allow
chip data transfer at higher speeds, as well as provide other
improvements and benefits. Our design and development process is
a multi-disciplinary effort requiring expertise in system
architecture, digital and analog circuit design and layout,
semiconductor process characteristics, packaging, printed
circuit board routing, signal integrity and high-speed testing
techniques.

As of December 31, 2007, we had approximately
290 employees in our engineering departments, representing
67% of our total employees. A significant number of our
engineers spend all or a portion of their time on research and
development. For the years ended December 31, 2007, 2006,
and 2005, research and development expenses were
$82.9 million, $69.0 million and $49.1 million,
respectively, including stock-compensation of approximately
$16.2 million, $14.9 million and $8.1 million,
respectively. We expect to continue to invest substantial funds
in research and development activities. In addition, because our
license and customer service agreements often call for us to
provide engineering support, a portion of our total engineering
costs are allocated to the cost of contract revenues, even
though some of these engineering efforts may have direct
applicability to our technology development.

The semiconductor industry is intensely competitive and has been
impacted by price erosion, rapid technological change, short
product life cycles, cyclical market patterns and increasing
foreign and domestic competition. Some semiconductor companies
have developed and support competing logic chip interfaces
including their own serial link chip interfaces and parallel bus
chip interfaces. We also face competition from semiconductor and
intellectual property companies who provide their own DDR memory
chip interface technology and solutions. In addition, most DRAM
manufacturers, including our XDR licensees, produce versions of
DRAM such as SDR, DDRx and GDDRx SDRAM which compete with XDR
chips. We believe that our principal competition for memory chip
interfaces may come from our licensees and prospective
licensees, some of which are evaluating and developing products
based on technologies that they contend or may contend will not
require a license from us. In addition, our competitors are also
taking a system approach similar to ours in seeking to solve the
application needs of system companies. Many of these companies
are larger and may have better access to financial, technical
and other resources than we possess.

JEDEC has standardized what it calls extensions of DDR, known as
DDR2 and DDR3, as well as graphics extensions called GDDR4 and
GDDR5, and there are ongoing efforts to integrate products such
as
system-in-package
DRAM. To the extent that these alternatives might provide
comparable system performance at lower than or similar cost to
XDR memory chips, or are perceived to require the payment of no
or lower royalties, or to the extent other factors influence the
industry, our licensees and prospective licensees may adopt and
promote alternative technologies. Even to the extent we
determine that such alternative technologies infringe our
patents, there can be no assurance that we would be able to
negotiate agreements that would result in royalties being paid
to us without litigation, which could be costly and the results
of which would be uncertain.

In the serial link chip interface business, we face additional
competition from semiconductor companies that sell discrete
transceiver chips for use in various types of systems, from
semiconductor companies that develop their own serial link chip
interfaces, as well as from competitors, such as ARM and
Synopsys, who license similar serial link chip interface
products and digital controllers. At the 10 Gb/s speed and
above, competition will also come from optical technology sold
by system and semiconductor companies. There are standardization
efforts underway or completed for serial links from standard
bodies such as PCI-SIG and OIF. We may face increased
competition from these types of consortia in the future that
could negatively impact our serial link chip interface business.

In the FlexIO processor bus and custom chip interface market, we
face additional competition from semiconductor companies who
develop their own parallel bus chip interfaces, as well as
competitors who license

similar parallel bus and custom chip interface products. As with
our memory chip interface products, to the extent that
competitive alternatives to our serial or parallel logic chip
interface products might provide comparable system performance
at lower or similar cost, or are perceived to require the
payment of no or lower royalties, or to the extent other factors
influence the industry, our licensees and prospective licensees
may adopt and promote alternative technologies.

As of December 31, 2007, we had approximately
430 full-time employees. None of our employees are covered
by collective bargaining agreements. We believe that our future
success is dependent on our continued ability to identify,
attract, motivate and retain qualified personnel. To date, we
believe that we have been successful in recruiting qualified
employees and that our relationship with our employees is
excellent.

We maintain and support an active program to protect our
intellectual property, primarily through the filing of patent
applications and the defense of issued patents against
infringement. As of December 31, 2007, we have more than
680 U.S. and foreign patents on various aspects of our
technology, with expiration dates ranging from 2010 to 2025, and
we have approximately 540 pending patent applications. In
addition, we attempt to protect our trade secrets and other
proprietary information through agreements with current and
prospective licensees, and confidentiality agreements with
employees and consultants and other security measures. We also
rely on trademarks and trade secret laws to protect our
intellectual property.

We operate in a single industry segment, the design, development
and licensing of chip interface technologies and architectures.
Information concerning revenues, results of operations and
revenues by geographic area is set forth in Item 6,
Selected Financial Data, in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and in Note 12,
Business Segments, Exports and Major Customers, of
Notes to Consolidated Financial Statements, all of which are
incorporated herein by reference. Information concerning
identifiable assets is also set forth in Note 12,
Business Segments, Exports and Major Customers, of
Notes to Consolidated Financial Statements. Information on
customers that comprise 10% or more of our consolidated revenues
and risks attendant to our foreign operations is set forth below
in Item 1A, Risk Factors.

Information regarding our executive officers and their ages and
positions as of December 31, 2007, is contained in the
table below. Our executive officers are appointed by, and serve
at the discretion of, our Board of Directors. There is no family
relationship between any of our executive officers.

Name

Age

Position and Business Experience

Kevin S. Donnelly

46

Senior Vice President, Engineering. Mr. Donnelly joined us in
1993. Mr. Donnelly has served in his current position since
March 2006. From February 2005 to March 2006, Mr. Donnelly
served as co-vice president of Engineering. From October 2002 to
February 2005 he served as vice president, Logic Interface
Division. Mr. Donnelly held various engineering and management
positions before becoming vice president, Logic Interface
Division in October 2002. Before joining us, Mr. Donnelly held
engineering positions at National Semiconductor, Sipex, and
Memorex, over an eight year period. He holds a B.S. in
Electrical Engineering and Computer Sciences from the University
of California, Berkeley, and an M.S. in Electrical Engineering
from San Jose State University.

Senior Vice President, Worldwide Sales, Licensing and Marketing.
Ms. Holt has served as our senior vice president, Worldwide
Sales, Licensing and Marketing (formerly titled Worldwide Sales
and Marketing) since joining us in August 2004. From November
1999 to July 2004, Ms. Holt held various positions at Agilent
Technologies, Inc., an electronics instruments and controls
company, most recently as vice president and general manager,
Americas Field Operations, Semiconductor Products Group. Prior
to Agilent Technologies, Inc., Ms. Holt held various
engineering, marketing, and sales management positions at
Hewlett-Packard Company, a hardware manufacturer. Ms. Holt holds
a B.S. in Electrical Engineering, with a minor in Mathematics,
from the Virginia Polytechnic Institute and State University.

Harold Hughes

62

Chief Executive Officer and President. Mr. Hughes has served as
our chief executive officer and president since January 2005 and
as a director since June 2003. He served as a United States Army
Officer from 1969 to 1972 before starting his private sector
career with Intel Corporation. Mr. Hughes held a variety of
positions within Intel Corporation from 1974 to 1997, including
treasurer, vice president of Intel Capital, chief financial
officer, and vice president of Planning and Logistics. Following
his tenure at Intel, Mr. Hughes was the chairman and chief
executive officer of Pandesic, LLC. He holds a B.A. from the
University of Wisconsin and an M.B.A. from the University of
Michigan. He also serves as a director of Berkeley Technology,
Ltd.

Thomas Lavelle

58

Senior Vice President and General Counsel. Mr. Lavelle has
served in his current position since December 2006. Previous to
that, Mr. Lavelle served as vice president and general counsel
at Xilinx, one of the worlds leading suppliers of
programmable chips. Mr. Lavelle joined Xilinx in 1999 after
spending more than 15 years at Intel Corporation where he
held various positions in the legal department. Mr. Lavelle
earned a J.D. from Santa Clara University School of Law and
a B.A. from the University of California at Los Angeles.

Satish Rishi

48

Senior Vice President, Finance and Chief Financial Officer. Mr.
Rishi joined us in his current position in April 2006. Prior to
joining us, Mr. Rishi held the position of executive vice
president of Finance and chief financial officer of Toppan
Photomasks, Inc., (formerly DuPont Photomasks, Inc.) one of the
worlds leading photomask providers, from November 2001 to
April 2006. During his 20-year career, Mr. Rishi has held senior
financial management positions at semiconductor and electronic
manufacturing companies. He served as vice president and
assistant treasurer at Dell Inc. Prior to Dell, Mr. Rishi spent
13 years at Intel Corporation, where he held financial
management positions both in the United States and overseas,
including assistant treasurer. Mr. Rishi holds a B.S. with
honors in Mechanical Engineering from Delhi University in Delhi,
India and an M.B.A. from the University of California at
Berkeleys Haas School of Business. He also serves as a
director of Measurement Specialties, Inc.

Vice President, Human Resources. Mr. Schroeder has served as our
vice president, Human Resources since joining us in June 2004.
From April 2003 to May 2004, Mr. Schroeder was vice president,
Human Resources at DigitalThink, Inc., an online service
company. From August 2000 to August 2002, Mr. Schroeder served
as vice president, Human Resources at Alphablox Corporation, a
software company. From August 1992 to August 2000, Mr. Schroeder
held various positions at Synopsys, Inc., a software and
programming company, including vice president, California Site
Human Resources, group director Human Resources, director Human
Resources and employment manager. Mr. Schroeder attended the
University of Wisconsin, Milwaukee and studied Russian.

Martin Scott, Ph.D.

52

Senior Vice President, Engineering. Dr. Scott has served in
his current position since December 2006. Dr. Scott joined
us from PMC-Sierra, Inc., a provider of broadband communications
and storage integrated circuits, where he was most recently vice
president and general manager of its Microprocessor Products
Division from March 2006. Dr. Scott was the vice president
and general manager for the I/O Solutions Division (which was
purchased by PMC-Sierra) of Avago Technologies Limited, an
analog and mixed signal semiconductor components and subsystem
company, from October 2005 to March 2006. Dr. Scott held
various positions at Agilent Technologies, including as vice
president and general manager for the I/O Solutions division
from October 2004 to October 2005, when the division was
purchased by Avago Technologies, vice president and general
manager of the ASSP Division from March 2002 until October 2004,
and, before that, Network Products operation manager.
Dr. Scott started his career in 1981 as a member of the
technical staff at Hewlett Packard Laboratories and held various
management positions at Hewlett Packard and was appointed ASIC
business unit manager in 1998. He earned a B.S. from Rice
University and holds both an M.S. and Ph.D. from Stanford
University.

Laura S. Stark

39

Senior Vice President, Platform Solutions. Ms. Stark joined us
in 1996 as strategic accounts manager, and held the positions of
strategic accounts director and vice president, Alliances and
Infrastructure, before assuming the position of vice president,
Memory Interface Division in October 2002. She held this
position until February 2005 when she was appointed to her
current position. Prior to that, Ms. Stark held various
positions in the semiconductor products division of Motorola, a
communications equipment company, during a six year tenure,
including technical sales engineer for the Apple sales team and
field application engineer for the Sun and SGI sales teams. Ms.
Stark holds a B.S. in Electrical Engineering from the
Massachusetts Institute of Technology.

Because of the following factors, as well as other variables
affecting our operating results, past financial performance may
not be a reliable indicator of future performance, and
historical trends should not be used to anticipate results or
trends in future periods. See also Forward-looking
Statements elsewhere in this report.

Litigation,
Regulation and Business Risks Related to our Intellectual
Property

We
face current and potential adverse determinations in litigation
stemming from our efforts to protect and enforce our patents and
intellectual property, which could broadly impact our
intellectual property rights, distract our management and cause
a substantial decline in our revenues and stock
price.

We seek to diligently protect our intellectual property rights.
In connection with the extension of our licensing program to SDR
SDRAM-compatible and DDR SDRAM-compatible products, we became
involved in litigation related to such efforts against different
parties in multiple jurisdictions. In each of these cases, we
have claimed infringement of certain of our patents, while the
manufacturers of such products have generally sought damages and
a determination that the patents in suit are invalid,
unenforceable, and not infringed. Among other things, the
opposing parties have alleged that certain of our patents are
unenforceable because we engaged in document spoliation,
litigation misconduct
and/or acted
improperly during our 1991 to 1995 participation in the JEDEC
standard setting organization (including allegations of
antitrust violations and unfair competition). See Note 16
Litigation and Asserted Claims of Notes to
Consolidated Financial Statements for additional information
regarding certain cases that are active as of the date of this
report.

There can be no assurance that any or all of the opposing
parties will not succeed, either at the trial or appellate
level, with such claims or counterclaims against us or that they
will not in some other way establish broad defenses against our
patents, achieve conflicting results, or otherwise avoid or
delay paying what we believe to be appropriate royalties for the
use of our patented technology. Moreover, there is a risk that
if one party prevails against us, other parties could use the
adverse result to defeat or limit our claims against them;
conversely, there can be no assurance that if we prevail against
one party, we will succeed against other parties on similar
claims, defenses, or counterclaims. In addition, there is the
risk that the pending litigations and other circumstances may
cause us to accept less than what we now believe to be fair
consideration in settlement. Among other things, there can be no
assurance that we will succeed in negotiating future settlements
or licenses on terms better than those extended in our Infineon
settlement. There can be no assurances that the circumstances
under which we negotiated our Infineon settlement will turn out
to be significantly different from the circumstances of future
cases and future settlements, although we currently believe that
significant differences do exist.

Any of these matters, whether or not determined in our favor or
settled by us, is costly, may cause delays (including delays in
negotiating licenses with other actual or potential licensees),
will tend to discourage future design partners, will tend to
impair adoption of our existing technologies and divert the
efforts and attention of our management and technical personnel
from other business operations. In addition, we may be
unsuccessful in our litigation if we have difficulty obtaining
the cooperation of former employees and agents who were involved
in our business during the relevant periods related to our
litigation and are now needed to assist in cases or testify on
our behalf. Furthermore, any adverse determination or other
resolution in litigation could result in our losing certain
rights beyond the rights at issue in a particular case,
including, among other things: our being effectively barred from
suing others for violating certain or all of our intellectual
property rights; our patents being held invalid or unenforceable
or not infringed; our being subjected to significant
liabilities; our being required to seek licenses from third
parties; our being prevented from licensing our patented
technology; or our being required to renegotiate with current
licensees on a temporary or permanent basis. Delay of any or all
of these adverse results could cause a substantial decline in
our revenues and stock price.

In addition to private litigations, we are involved in
proceedings brought against us by one or more government
agencies and we may become involved in future proceedings by
other government agencies. The FTC brought an administrative
action against us alleging, among other things, that we had
failed to disclose certain patents and patent applications
during our membership in JEDEC while it established SDRAM
standards and that we, therefore, should be precluded from
enforcing certain of our intellectual property rights in patents
with a priority date prior to June 1996. See Note 16
Litigation and Asserted Claims of Notes to
Consolidated Financial Statements for a discussion of the
FTC action. At the conclusion of this proceeding, the FTC found
that our conduct at JEDEC was improper and issued an order on
February 2, 2007, that, among other things, limits the
royalty rates we may charge to license certain patents that
cover certain JEDEC-compliant SDR and DDR SDRAM memory and
controller products sold after April 12, 2007. Although we
obtained a partial stay of the remedy order pending our appeal
of the FTC decision, the FTCs adverse decision and remedy
order has already impaired and may continue to significantly
limit our ability to enforce or license our patents or collect
royalties from existing or potential licensees. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Royalty
Revenues  Patent Licenses for a discussion of
the terms of the FTC order. Moreover, there can be no assurance
that, despite our best efforts to comply with the FTC orders,
the FTC will interpret its orders in the same way, or that any
differences in interpretation will not cause changes, delays or
further restatements to our licensing revenue. The European
Commission has instituted similar proceedings against us but has
not yet issued a decision. These proceedings, or one by any
other governmental agency, have already resulted in and may
result in further adverse determination against us or in other
outcomes that could limit our ability to enforce or license our
intellectual property, and could cause our revenues to decline
substantially.

In addition, third parties have and may attempt to use adverse
findings by a government agency to limit our ability to enforce
our patents in private litigations and to assert claims for
monetary damages against us. Although we have successfully
defeated certain attempts to do so, there can be no assurance
that other third parties will not be successful in the future or
that additional claims or actions arising out of adverse
findings by a government agency will not be asserted against us.

Further, third parties have sought and may seek review and
reconsideration of the patentability of inventions claimed in
certain of our patents by the United States Patent &
Trademark Office (the PTO)
and/or the
European Patent Office (the EPO). An adverse
decision by the PTO or EPO could invalidate some or all of these
patent claims and could also result in additional adverse
consequences affecting other related U.S. or European
patents. If a sufficient number of such patents are impaired,
our ability to enforce or license our intellectual property
would be significantly weakened and this could cause our
revenues to decline substantially.

Our research and development programs are in highly competitive
fields in which numerous third parties have issued patents and
patent applications with claims closely related to the subject
matter of our research and development programs. We have also
been named in the past, and may in the future be named, as a
defendant in lawsuits claiming that our technology infringes
upon the intellectual property rights of third parties. In the
event of a third-party claim or a successful infringement action
against us, we may be required to pay substantial damages, to
stop developing and licensing our infringing technology, to
develop non-infringing technology, and to obtain licenses, which
could result in our paying substantial royalties or our granting
of cross licenses to our technologies. We may not be able to
obtain licenses from other parties at a reasonable cost, or at
all, which could cause us to expend substantial resources, or
result in delays in, or the cancellation of, new product.

We rely primarily on a combination of license, development and
nondisclosure agreements, trademark, trade secret and copyright
law, and contractual provisions to protect our non-patentable
intellectual property rights. If we fail to protect these
intellectual property rights, our licensees and others may seek
to use our technology without the payment of license fees and
royalties, which could weaken our competitive position, reduce
our operating results and increase the likelihood of costly
litigation. The growth of our business depends in large part on
the use of our intellectual property in the products of third
party manufacturers, and our ability to enforce intellectual
property rights against them to obtain appropriate compensation.
In addition, effective trade secret protection may be
unavailable or limited in certain foreign countries. Although we
intend to protect our rights vigorously, if we fail to do so,
our business will suffer.

Many of our license agreements require our licensees to document
the manufacture and sale of products that incorporate our
technology and report this data to us on a quarterly basis.
While licenses with such terms give us the right to audit books
and records of our licensees to verify this information, audits
rarely are undertaken because they can be expensive, time
consuming, and potentially detrimental to our ongoing business
relationship with our licensees. Therefore, we rely on the
accuracy of the reports from licensees without independently
verifying the information in them. Our failure to audit our
licensees books and records may result in our receiving
more or less royalty revenues than we are entitled to under the
terms of our license agreements. If we conducted royalty audits
in the future, such audits may trigger disagreements over
contract terms with our licensees and such disagreements could
hamper customer relations, divert the efforts and attention of
our management from normal operations and impact our business
operations and financial condition.

On March 21, 2005, we entered into a settlement and license
agreement with Infineon (and its former parent Siemens), which
was assigned to Qimonda in October 2006 in connection with
Infineons spin-off of Qimonda. The settlement and license
agreement, among other things, requires Qimonda to pay to us
aggregate royalties of

$50.0 million in quarterly installments of approximately
$5.85 million, which started on November 15, 2005. The
settlement and license agreement further provides that if we
enter into licenses with certain other DRAM manufacturers,
Qimonda will be required to make additional royalty payments to
us that may aggregate up to $100.0 million. As we have not
yet succeeded in entering into these additional license
agreements necessary to trigger Qimondas obligations,
Qimondas quarterly payment decreased to $3.2 million
in the fourth quarter of 2007, and has ceased in the first
quarter of 2008. The quarterly payments with Qimonda will not
recommence until we enter into additional license agreements
with certain other DRAM manufacturers. We may not succeed in
entering into these additional license agreements necessary to
trigger Qimondas obligations under the settlement and
license agreement to pay to us additional royalty payments,
thereby reducing the value of the settlement and license
agreement to us.

Our license with Qimonda (formerly Infineons DRAM
operations), which was part of our settlement with Infineon,
provides for the extension of certain benefits under that
license to a successor in interest that, under certain
conditions, acquires all of Qimondas DRAM operations. If
such an acquisition were to occur, such successor would be
entitled to the extension of such benefits, including the
ability to pay a royalty calculated by multiplying the Qimonda
rate by the percentage increase in DRAM volume represented by
the successor companys combined operations. Such an
extension of benefits could also make it more difficult for us
to obtain the royalty rates we believe are appropriate from the
market as a whole. Such an extension of benefits would, in
addition, also operate to extend a release of claims to such
successor, thus reducing the number of companies from which we
may seek compensation for the antitrust injury alleged by us in
our pending price-fixing action in San Francisco.

In any potential dispute involving our patents or other
intellectual property, our licensees could also become the
target of litigation. While we generally do not indemnify our
licensees, some of our license agreements provide limited
indemnities, some require us to provide technical support and
information to a licensee that is involved in litigation
involving use of our technology, and we may agree to indemnify
others in the future. Our indemnification and support
obligations could result in substantial expenses. In addition to
the time and expense required for us to indemnify or supply such
support to our licensees, a licensees development,
marketing and sales of licensed semiconductors could be severely
disrupted or shut down as a result of litigation, which in turn
could severely hamper our business operations and financial
condition.

An important part of our strategy is to penetrate market
segments for chip interfaces by working with leaders in those
market segments. This strategy is designed to encourage other
participants in those segments to follow such leaders in
adopting our chip interfaces. If a high profile industry
participant adopts our chip interfaces but fails to achieve
success with its products or adopts and achieves success with a
competing chip interface, our reputation and sales could be
adversely affected. In addition, some industry participants have
adopted, and others may in the future adopt, a strategy of
disparaging our memory solutions adopted by their competitors or
a strategy of otherwise undermining the market adoption of our
solutions.

We target system companies to adopt our chip interface
technologies, particularly those that develop and market high
volume business and consumer products, which have traditionally
been focused on PCs and video game consoles, but also are
expanding to include HDTVs, cellular and digital phones, PDAs,
digital cameras and other consumer electronics that incorporate
all varieties of memory and chip interfaces. In particular, our
strategy includes gaining acceptance of our technology in high
volume consumer applications, including video game consoles,
such as the Sony PlayStation
®
2 and Sony PLAYSTATION
®
3, HDTVs and set top boxes. We are subject

to many risks beyond our control that influence whether or not a
particular system company will adopt our chip interfaces,
including, among others:



competition faced by a system company in its particular industry;



the timely introduction and market acceptance of a system
companys products;



the engineering, sales and marketing and management capabilities
of a system company;



technical challenges unrelated to our chip interfaces faced by a
system company in developing its products;



the financial and other resources of the system company;



the supply of semiconductors from our licensees in sufficient
quantities and at commercially attractive prices;



the ability to establish the prices at which the chips
containing our chip interfaces are made available to system
companies; and



the degree to which our licensees promote our chip interfaces to
a system company.

There can be no assurance that consumer products that currently
use our technology will continue to do so, nor can there be any
assurance that the consumer products that incorporate our
technology will be successful in their segments thereby
generating expected royalties, nor can there be any assurance
that any of our technologies selected for licensing will be
implemented in a commercially developed or distributed product.

If any of these events occur and market leaders do not
successfully adopt our technologies, our strategy may not be
successful and, as a result, our results of operations could
decline.

If new competitors, technological advances by existing
competitors, our entry into new markets, or other competitive
factors require us to invest significantly greater resources
than anticipated in our research and development efforts, our
operating expenses would increase. For the years ended
December 31, 2007, 2006, and 2005, research and development
expenses were $82.9 million, $69.0 million and
$49.1 million, respectively, including stock-compensation
of approximately $16.2 million, $14.9 million and
$8.1 million, respectively. If we are required to invest
significantly greater resources than anticipated in research and
development efforts without an increase in revenue, our
operating results could decline. Research and development
expenses are likely to fluctuate from time to time to the extent
we make periodic incremental investments in research and
development and these investments may be independent of our
level of revenue. In order to grow, which may include entering
new markets, we anticipate that we will continue to devote
substantial resources to research and development, and we expect
these expenses to increase in absolute dollars in the
foreseeable future due to the increased complexity and the
greater number of products under development as well as hiring
additional employees.

We have a high degree of revenue concentration, with our top
five licensees representing approximately 67%, 63% and 73% of
our revenues for the year ended December 31, 2007, 2006 and
2005, respectively. For the year ended December 31, 2007,
revenues from Fujitsu, Elpida, Qimonda and Toshiba, each
accounted for 10% or more of total revenues. For the year ended
December 31, 2006, revenues from Fujitsu, Elpida, Qimonda
and Intel, each accounted for 10% or more of total revenues. For
the year ended December 31, 2005, revenue from Intel,
Elpida, Toshiba and Matsushita, each accounted for 10% or more
of our total revenues. We may continue to experience significant
revenue concentration for the foreseeable future.

Substantially all of our licensees have the right to cancel
their licenses. Failure to renew licenses
and/or the
loss of any of our top five licensees would cause revenues to
decline substantially. Intel has been one of our largest
customers and is an important catalyst for the development of
new memory and logic chip interfaces in the

semiconductor industry. We have a patent cross-license agreement
with Intel for which we received quarterly royalty payments
through the second quarter of 2006. The patent cross-license
agreement expired in September 2006. Intel now has a paid up
license for the use of all of our patents which claimed priority
prior to September 2006. We have other licenses with Intel, in
addition to the patent cross-license agreement, for the
development of serial link chip interfaces. If we do not
continue to replace the revenues we previously received under
the Intel contract, our results of operations may decline
significantly.

In addition, some of our commercial agreements require us to
provide certain customers with the lowest royalty rate that we
provide to other customers for similar technologies, volumes and
schedules. These clauses may limit our ability to effectively
price differently among our customers, to respond quickly to
market forces, or otherwise to compete on the basis of price.
The particular licensees which account for revenue concentration
have varied from period to period as a result of the addition of
new contracts, expiration of existing contracts, industry
consolidation, the expiration of deferred revenue schedules
under existing contracts, and the volumes and prices at which
the licensees have recently sold licensed semiconductors to
system companies. These variations are expected to continue in
the foreseeable future, although we anticipate that revenue will
continue to be concentrated in a limited number of licensees.

We are in negotiations with licensees and prospective licensees
to reach SDR and DDR patent license agreements. We expect SDR
and DDR patent license royalties will continue to vary from
period to period based on our success in renewing existing
license agreements and adding new licensees, as well as the
level of variation in our licensees reported shipment
volumes, sales price and mix, offset in part by the proportion
of licensee payments that are fixed. If we are unsuccessful in
renewing any of our SDR and DDR-compatible contracts, our
results of operations may decline significantly.

We are subject to income taxes in both the United States and
various foreign jurisdictions. Significant judgment is required
in determining our worldwide provision (benefit) for income
taxes and, in the ordinary course of business, there are many
transactions and calculations where the ultimate tax
determination is uncertain. Our effective tax rate could be
adversely affected by changes in the mix of earnings in
countries with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax
laws as well as other factors. Our tax determinations are
regularly subject to audit by tax authorities and developments
in those audits could adversely affect our income tax provision.
Although we believe that our tax estimates are reasonable, the
final determination of tax audits or tax disputes may be
different from what is reflected in our historical income tax
provisions which could affect our operating results.

The realization of our net deferred tax assets of approximately
$127.8 million as of December 31, 2007 is solely
dependent on our ability to generate sufficient future taxable
income during periods before the expiration of tax statutes.
Forecasted income is based on assumptions about current trends
in operations and future litigation outcomes or expected
settlements, and there can be no assurance that such results
will be achieved. We review such forecasts in comparison with
actual results and expected trends at least quarterly for the
purpose of realizability assessment. If we determine that we
will have insufficient future taxable income to fully realize
the net deferred tax assets, we will record a valuation
allowance by a charge to income tax expense.

The semiconductor industry is characterized by rapid
technological change, with new generations of semiconductors
being introduced periodically and with ongoing improvements. We
derive most of our revenue from our chip interface technologies
that we have patented. We expect that this dependence on our
fundamental technology will continue for the foreseeable future.
The introduction or market acceptance of competing chip
interfaces that render our chip interfaces less desirable or
obsolete would have a rapid and material adverse effect on our
business, results of operations and financial condition. The
announcement of new chip interfaces by us could cause licensees
or system companies to delay or defer entering into arrangements
for the use of our current chip interfaces, which

could have a material adverse effect on our business, financial
condition and results of operations. We are dependent on the
semiconductor industry to develop test solutions that are
adequate to test our chip interfaces and to supply such test
solutions to our customers and us.

Our continued success depends on our ability to introduce and
patent enhancements and new generations of our chip interface
technologies that keep pace with other changes in the
semiconductor industry and which achieve rapid market
acceptance. We must continually devote significant engineering
resources to addressing the ever increasing need for higher
speed chip interfaces associated with increases in the speed of
microprocessors and other controllers. The technical innovations
that are required for us to be successful are inherently complex
and require long development cycles, and there can be no
assurance that our development efforts will ultimately be
successful. In addition, these innovations must be:



completed before changes in the semiconductor industry render
them obsolete;



available when system companies require these
innovations; and



sufficiently compelling to cause semiconductor manufacturers to
enter into licensing arrangements with us for these new
technologies.

Finally, significant technological innovations generally require
a substantial investment before their commercial viability can
be determined. There can be no assurance that we have accurately
estimated the amount of resources required to complete the
projects, or that we will have, or be able to expend, sufficient
resources required for these types of projects. In addition,
there is market risk associated with these products, and there
can be no assurance that unit volumes, and their associated
royalties, will occur. If our technology fails to capture or
maintain a portion of the high volume consumer market, our
business results could suffer.

If we cannot successfully respond to rapid technological changes
in the semiconductor industry by developing new products in a
timely and cost effective manner our operating results will
suffer.

The semiconductor industry is intensely competitive and has been
impacted by price erosion, rapid technological change, short
product life cycles, cyclical market patterns and increasing
foreign and domestic competition. Some semiconductor companies
have developed and support competing logic chip interfaces
including their own serial link chip interfaces and parallel bus
chip interfaces. We also face competition from semiconductor and
intellectual property companies who provide their own DDR memory
chip interface technology and solutions. In addition, most DRAM
manufacturers, including our XDR licensees, produce versions of
DRAM such as SDR, DDRx and GDDRx SDRAM which compete with XDR
chips. We believe that our principal competition for memory chip
interfaces may come from our licensees and prospective
licensees, some of which are evaluating and developing products
based on technologies that they contend or may contend will not
require a license from us. In addition, our competitors are also
taking a system approach similar to ours in seeking to solve the
application needs of system companies. Many of these companies
are larger and may have better access to financial, technical
and other resources than we possess. Wider applications of other
developing memory technologies, including FLASH memory, may also
pose competition to our licensed memory solutions.

As the semiconductor industry is highly cyclical, significant
economic downturns characterized by diminished demand, erosion
of average selling prices, production overcapacity and
production capacity constraints could affect the semiconductor
industry. As a result, we may face a reduced number of licensing
wins, tightening of customers operating budgets,
extensions of the approval process for new licenses and
consolidation among our customers, all of which may adversely
affect the demand for our technology and may cause us to
experience substantial
period-to-period
fluctuations in our operating results.

JEDEC has standardized what it calls extensions of DDR, known as
DDR2 and DDR3. Other efforts are underway to create other
products including those sometimes referred to as GDDR4 and
GDDR5, as well as new ways to integrate products such as
system-in-package
DRAM. To the extent that these alternatives might provide
comparable system performance at lower or similar cost than XDR
memory chips, or are perceived to require the payment of no or
lower royalties, or to the extent other factors influence the
industry, our licensees and prospective

licensees may adopt and promote alternative technologies. Even
to the extent we determine that such alternative technologies
infringe our patents, there can be no assurance that we would be
able to negotiate agreements that would result in royalties
being paid to us without litigation, which could be costly and
the results of which would be uncertain. In the industry
standard and leadership serial link chip interface business, we
face additional competition from semiconductor companies that
sell discrete transceiver chips for use in various types of
systems, from semiconductor companies that develop their own
serial link chip interfaces, as well as from competitors, such
as ARM and Synopsys, who license similar serial link chip
interface products and digital controllers. At the 10 Gb/s
speed, competition will also come from optical technology sold
by system and semiconductor companies. There are standardization
efforts under way or completed for serial links from standard
bodies such as PCI-SIG and OIF. We may face increased
competition from these types of consortia in the future that
could negatively impact our serial link chip interface business.

In the FlexIO processor bus chip interface market segment, we
face additional competition from semiconductor companies who
develop their own parallel bus chip interfaces, as well as
competitors who license similar parallel bus chip interface
products. We may also see competition from industry consortia or
standard setting bodies that could negatively impact our FlexIO
processor bus chip interface business.

As with our memory chip interface products, to the extent that
competitive alternatives to our serial or parallel logic chip
interface products might provide comparable system performance
at lower or similar cost, or are perceived to require the
payment of no or lower royalties, or to the extent other factors
influence the industry, our licensees and prospective licensees
may adopt and promote alternative technologies, which could
negatively impact our memory and logic chip interface business.

If for any of these reasons we cannot effectively compete in
these primary market segments, our results of operations could
suffer.

We have no control over our licensees pricing of their
products and there can be no assurance that licensee products
using or containing our chip interfaces will be competitively
priced or will sell in significant volumes. One important
requirement for our memory chip interfaces is for any premium
charged by our licensees in the price of memory and controller
chips over alternatives to be reasonable in comparison to the
perceived benefits of the chip interfaces. If the benefits of
our technology do not match the price premium charged by our
licensees, the resulting decline in sales of products
incorporating our technology could harm our operating results.

The process of persuading customers to adopt and license our
chip interface technologies can be lengthy and, even if
successful, there can be no assurance that our chip interfaces
will be used in a product that is ultimately brought to market,
achieves commercial acceptance, or results in significant
royalties to us. We generally incur significant marketing and
sales expenses prior to entering into our license agreements,
generating a license fee and establishing a royalty stream from
each licensee. The length of time it takes to establish a new
licensing relationship can take many months. In addition, our
ongoing intellectual property litigation and regulatory actions
have and will likely continue to have an impact on our ability
to enter into new licenses and renewals of licenses. For
example, we believe that the uncertainty surrounding the
implementation and timing of the FTCs Maximum Allowable
Royalties under the FTC order has led to greater delay and
uncertainty with respect to certain license renewal
negotiations. As such, we may incur costs in any particular
period before any associated revenues stream begins. If our
marketing and sales efforts are very lengthy or unsuccessful,
then we may face a material adverse effect on our business and
results of operations as a result of delay or failure to obtain
royalties.

Our lengthy and costly license negotiation cycle makes our
future revenues difficult to predict in the event that we are
not successful entering into licenses with our customers on our
estimated timelines. In addition, a portion of our revenue comes
from development and support services provided to our licensees.
Depending upon the nature of

the services, a portion of the related revenue may be recognized
ratably over the support period, or may be recognized according
to contract accounting. Contract revenue accounting may result
in deferral of the service fees to the completion of the
contract, or may be recognized over the period in which services
are performed on a
percentage-of-completion
basis. There can be no assurance that the product development
schedule for these projects will not be changed or delayed. All
of these factors make it difficult to predict future licensing
revenue and may result in our missing previously announced
earnings guidance or analysts estimates which would likely
cause our stock price to decline.

Since many of our revenue components fluctuate and are difficult
to predict, and our expenses are largely independent of revenues
in any particular period, it is difficult for us to accurately
forecast revenues and profitability. Factors other than those
set forth above, which are beyond our ability to control or
assess in advance, that could cause our operating results to
fluctuate include:



semiconductor and system companies acceptance of our chip
interface products;



the success of high volume consumer applications, such as the
Sony PLAYSTATION
®3;



the dependence of our royalties upon fluctuating sales volumes
and prices of licensed chips that include our technology;

the unpredictability of the timing and amount of any litigation
expenses;



changes in our chip and system company customers
development schedules and levels of expenditure on research and
development;



our licensees terminating or failing to make payments under
their current contracts or seeking to modify such
contracts; and



changes in our strategies, including changes in our licensing
focus and/or
possible acquisitions of companies with business models
different from our own.

For the years ended December 31, 2007, 2006 and 2005,
royalties accounted for 86%, 87% and 83%, respectively, of our
total revenues, and we believe that royalties will continue to
represent a majority of total revenues for the foreseeable
future. Royalties are generally recognized in the quarter in
which we receive a report from a licensee regarding the sale of
licensed chips in the prior quarter; however, royalties are
recognized only if collectibility is assured. As a result of
these uncertainties and effects being outside of our control,
royalty revenues are difficult to predict and make accurate
financial forecasts difficult to achieve, which could cause our
stock price to become volatile and decline.

For the years ended December 31, 2007, 2006 and 2005
revenues from our sales to international customers constituted
approximately 85%, 75% and 71% of our total revenues,
respectively. We currently have international operations in
India (design), Japan (business development), Taiwan (business
development), Germany (business development) and Korea (business
development). As a result of our continued focus on
international markets, we expect that future revenues derived
from international sources will continue to represent a
significant portion of our total revenues.

To date, all of the revenues from international licensees have
been denominated in U.S. dollars. However, to the extent
that such licensees sales to systems companies are not
denominated in U.S. dollars, any royalties which are based
as a percentage of the customers sales that we receive as
a result of such sales could be subject to fluctuations in
currency exchange rates. In addition, if the effective price of
licensed semiconductors sold by our foreign licensees were to
increase as a result of fluctuations in the exchange rate of the
relevant currencies, demand for licensed semiconductors could
fall, which in turn would reduce our royalties. We do not use
financial instruments to hedge foreign exchange rate risk.

Our international operations and revenues are subject to a
variety of risks which are beyond our control, including:

profits, if any, earned abroad being subject to local tax laws
and not being repatriated to the United States or, if
repatriation is possible, limited in amount;



changes to tax codes and treatment of revenues from
international sources, including being subject to foreign tax
laws and potentially being liable for paying taxes in that
foreign jurisdiction;



foreign government regulations and changes in these regulations;



social, political and economic instability;



lack of protection of our intellectual property and other
contract rights by jurisdictions in which we may do business to
the same extent as the laws of the United States;



changes in diplomatic and trade relationships;



cultural differences in the conduct of business both with
licensees and in conducting business in our international
facilities and international sales offices;



operating centers outside the United States;



hiring, maintaining and managing a workforce remotely and under
various legal systems; and



geo-political issues.

We and our licensees are subject to many of the risks described
above with respect to companies which are located in different
countries, particularly home video game console and PC
manufacturers located in Asia and elsewhere. There can be no
assurance that one or more of the risks associated with our
international operations could not result in a material adverse
effect on our business, financial condition or results of
operations.

The methods, estimates, and judgments we use in applying our
accounting policies have a significant impact on our results of
operations, as described elsewhere in this report. Such methods,
estimates, and judgments are, by their nature, subject to
substantial risks, uncertainties, and assumptions, and factors
may arise over time that lead us to change our methods,
estimates, and judgments. Changes in those methods, estimates,
and judgments could significantly affect our results of
operations. In particular, the calculation of share-based
compensation expense under Statement of Financial Accounting
Standards No. 123(R) (SFAS No. 123(R)),
requires us to use valuation methodologies which were not
developed for use in valuing employee stock options and a number
of assumptions, estimates, and conclusions regarding matters
such as expected forfeitures, expected volatility of our share
price, and the exercise behavior of our employees. Furthermore,
there are no means, under applicable accounting principles, to
compare and adjust our expense if and when we learn about
additional information that may affect the estimates that we
previously made, with the exception of changes in expected
forfeitures of share-based awards. Factors may arise that lead
us to change our estimates and assumptions with respect to
future share-based compensation arrangements, resulting in
variability in our share-based compensation expense over time.
Changes in forecasted stock-based compensation expense could
impact our cost of contract revenues, research and development
expenses,

Our business has experienced periods of rapid growth that have
placed, and may continue to place, significant demands on our
managerial, operational and financial resources. In order to
manage this growth, we must continue to improve and expand our
management, operational and financial systems and controls. We
also need to continue to expand, train and manage our employee
base. We cannot assure you that we will be able to timely and
effectively meet demand and maintain the quality standards
required by our existing and potential customers and licensees.
If we ineffectively manage our growth or we are unsuccessful in
recruiting and retaining personnel, our business and operating
results will be harmed.

We may continue to make investments in companies, products or
technologies or enter into mergers, strategic transactions or
other arrangements. If we buy a company or a division of a
company, we may experience difficulty integrating that
companys or divisions personnel and operations,
which could negatively affect our operating results. In addition:



the key personnel of the acquired company may decide not to work
for us;



we may experience additional financial and accounting challenges
and complexities in areas such as tax planning, cash management
and financial reporting;



our ongoing business may be disrupted or receive insufficient
management attention;



we may not be able to recognize the cost savings or other
financial benefits we anticipated; and



our increasing international presence resulting from
acquisitions may increase our exposure to international
currency, tax and political risks.

In connection with future acquisitions or mergers, strategic
transactions or other arrangements, we may incur substantial
expenses regardless of whether the transaction occurs. In
addition, we may be required to assume the liabilities of the
companies we acquire. By assuming the liabilities, we may incur
liabilities such as those related to intellectual property
infringement or indemnification of customers of acquired
businesses for similar claims, which could materially and
adversely affect our business. We may have to incur debt or
issue equity securities to pay for any future acquisition, the
issuance of which could involve restrictive covenants or be
dilutive to our existing stockholders.

Our success is dependent upon our ability to identify, attract,
compensate, motivate and retain qualified personnel, especially
engineers, who can enhance our existing technologies and
introduce new technologies. Competition for qualified personnel,
particularly those with significant industry experience, is
intense, in particular in the San Francisco Bay Area where
we are headquartered and in the area of Bangalore, India where
we have a design center. We are also dependent upon our senior
management personnel. The loss of the services of any of our
senior management personnel, or key sales personnel in critical
markets, or critical members of staff, or of a significant
number of our engineers could be disruptive to our development
efforts or business relationships and could cause our business
and operations to suffer.

We have historically used stock options and other forms of
stock-based compensation as key components of our employee
compensation program in order to align employees interests
with the interests of our stockholders, encourage employee
retention and provide competitive compensation and benefit
packages. As a result of changes

in accounting principles, we have incurred increased
compensation costs associated with our stock-based compensation
programs. As a result and as part of our overall compensation
philosophy, we have worked to reduce the issuance of equity as a
percentage of overall compensation and the number of equity
awards issued annually as a percentage of our total outstanding
shares. In addition, if we face any difficulty relating to
obtaining stockholder approval of our equity compensation plans,
it could make it harder or more expensive for us to grant
stock-based payments to employees in the future. As a result of
these factors leading to lower equity compensation of our
employees, we may find it difficult to attract, retain and
motivate employees, and any such difficulty could materially
adversely affect our business.

Our business operations depend on our ability to maintain and
protect our facility, computer systems and personnel, which are
primarily located in the San Francisco Bay Area. The
San Francisco Bay Area is in close proximity to known
earthquake fault zones. Our facility and transportation for our
employees are susceptible to damage from earthquakes and other
natural disasters such as fires, floods and similar events.
Should an earthquake or other catastrophes, such as fires,
floods, power loss, communication failure or similar events
disable our facilities, we do not have readily available
alternative facilities from which we could conduct our business,
which stoppage could have a negative effect on our operating
results. Acts of terrorism, widespread illness and war could
also have a negative effect at our international and domestic
facilities.

Our Common Stock is listed on The Nasdaq Global Select Market
under the symbol RMBS. The trading price of our
Common Stock has been subject to wide fluctuations which may
continue in the future in response to, among other things, the
following:



any progress, or lack of progress, in the development of
products that incorporate our chip interfaces;



our signing or not signing new licensees;



new litigation or developments in current litigation as
discussed above;



announcements of our technological innovations or new products
by us, our licensees or our competitors;



positive or negative reports by securities analysts as to our
expected financial results;



developments with respect to patents or proprietary rights and
other events or factors; and



any delisting of our Common Stock from The Nasdaq Global Select
Market.

In addition, the equity markets have experienced volatility that
has particularly affected the market prices of equity securities
of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of
such companies.

If we
fail to remediate any material weaknesses in our internal
control over financial reporting, we may be unable to accurately
report our financial results or reasonably prevent fraud which
could result in a loss of investor confidence in our financial
reports and have an adverse effect on our business and operating
results and our stock price.

Effective internal control over financial reporting is essential
for us to produce reliable financial reports and prevent fraud.
If we cannot provide reliable financial information or prevent
fraud, our business and operating results, as well as our stock
price, could be harmed. We have during the year ended
December 31, 2007 discovered, and may in the future
discover, material weaknesses in our internal control over
financial reporting. A failure to implement and maintain
effective internal control over financial reporting, could harm
our operating results, result

in a material misstatement of our financial statements, cause us
to fail to meet our financial reporting obligations or prevent
us from providing reliable and accurate financial reports or
avoiding or detecting fraud. This, in turn, could result in a
loss of investor confidence in the accuracy and completeness of
our financial reports, which could have an adverse effect on our
stock price.

Changing laws, regulations and standards relating to corporate
governance and public disclosure, including new SEC regulations
and Nasdaq rules, are creating uncertainty for companies such as
ours. These new or changed laws, regulations and standards are
subject to varying interpretations in many cases due to their
lack of specificity, and as a result, their application in
practice may evolve over time as new guidance is provided by
regulatory and governing bodies, which could result in
continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply
with evolving laws, regulations and standards, and this
investment may result in increased general and administrative
expenses and a diversion of management time and attention from
revenue generating activities to compliance activities. If our
efforts to comply with new or changed laws, regulations and
standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, our
reputation may be harmed.

During 2006 and 2007, our Audit Committee conducted an internal
investigation of the timing of stock option grant practices and
related accounting issues, and, as a result of the findings, we
restated various previously filed financial statements. The
costs of the investigation and restatement and any settlements,
payment of claims, fines, taxes and other costs led to
substantial expenses that materially affected our cash balance
and cash flows from operations. In addition, the recent
restatement of our financial results and any negative outcome
that may occur from these investigations could impact our
reputation, including our relationships with our investors and
our licensees, our ability to hire and retain qualified
personnel, our ability to acquire new licensees and other
business partners and, ultimately, our ability to generate
revenue. Furthermore, considerable legal and accounting expenses
related to these matters have been incurred to date and
significant expenditures may continue to be incurred in the
future.

Future government actions may result from the completion of the
investigation of stock option grants. We are also under
examination by the Internal Revenue Service (IRS) on
the various tax reporting implications resulting from the
investigation. There is no assurance that other regulatory
inquiries will not be commenced by other U.S. federal,
state or foreign regulatory agencies, including the IRS and
other tax authorities. The unfavorable resolution of any
potential tax or other regulatory proceeding or action could
require us to make significant payments in overdue taxes,
penalties and fines or otherwise record charges (or reduce tax
assets) that may adversely affect our results of operations and
financial condition.

In addition, our bylaws and certain indemnification agreements
require us to indemnify our current and former directors,
officers, employees and agents against most actions of a civil,
criminal, administrative or investigative nature unless such
person acted criminally, in a manner opposed to our best
interests or did not act in good faith. Generally, we are
required to advance indemnification expenses prior to any final
adjudication of an individuals culpability. Therefore, the
expense of indemnifying our current and former directors,
officers and employees and agents in their defense or related
expenses as a result of the derivative, class action and any
regulatory actions related to the investigation and financial
restatement may be significant. Therefore, our indemnification
obligations could result in the diversion of our financial
resources that adversely affects our business, financial
condition and results of operations.

Several shareholder derivative actions were filed in state and
federal courts against certain of our current and former
officers and directors, as well as our current auditors, related
to the stock option investigation. The actions were brought by
persons identifying themselves as shareholders and purporting to
act on our behalf. We are named solely as a nominal defendant
against whom the plaintiffs seek no recovery. The complaints
allege that certain of these defendants violated securities laws
and/or
breached their fiduciary duties to us and obtained unjust
enrichment in connection with grants of stock options to certain
of our officers that were allegedly improperly dated. The
complaints seek unspecified monetary damages and disgorgement
from the defendants, as well as unspecified equitable relief.
Additionally, several securities fraud class actions and
individual lawsuits were filed in federal court against us and
certain of our current and former officers and directors. The
complaints generally allege that the defendants violated the
federal securities laws by filing documents with the SEC
containing false statements regarding our accounting treatment
of the stock option granting actions under investigation. The
individual lawsuits allege not only federal and state securities
law violations, but also state law claims for fraud and breach
of fiduciary duty. The class actions have been consolidated into
a single proceeding. On September 7, 2007, the parties to
this class action proceeding advised the court that they had
reached a settlement in principle of the litigation. The
settlement, which is subject to final documentation and approval
by the court, provides for a payment of $18 million by us
for a dismissal with prejudice of all claims against all
defendants. See Note 16 Litigation and Asserted
Claims of Notes to Consolidated Financial Statements for
more information.

There can be no assurance that further lawsuits by parties who
allege they suffered injury as a consequence of our past stock
option granting practices will not be filed in the future. The
amount of time to resolve these current and any future lawsuits
is uncertain, and these matters could require significant
management and financial resources which could otherwise be
devoted to the operation of our business. Although we have
accrued an estimate of certain liabilities that we believe will
result from certain of these actions, including the
$18 million mentioned above, the actual costs and expenses
to defend and satisfy all of these lawsuits and any potential
future litigation will exceed our current estimated accruals,
possibly significantly. Unfavorable outcomes and significant
judgments, settlements and legal expenses in the litigation
related to our past stock option granting practices could have
material adverse impacts on our business, financial condition,
results of operations, cash flows and the trading price of our
Common Stock.

We have indebtedness. On February 1, 2005, we issued
$300.0 million aggregate principal amount of zero coupon
convertible senior notes (convertible notes) due
February 1, 2010, of which $160.0 million remains
outstanding as of the date of this report.

The degree to which we are leveraged could have important
consequences, including, but not limited to, the following:



our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general
corporate or other purposes may be limited;



a substantial portion of our cash flows from operations will be
dedicated to the payment of the principal of our indebtedness as
we are required to pay the principal amount of the convertible
notes in cash when due;



if we elect to pay any premium on the convertible notes with
shares of our Common Stock or we are required to pay a
make-whole premium with our shares of Common Stock,
our existing stockholders interest in us would be
diluted; and



we may be more vulnerable to economic downturns, less able to
withstand competitive pressures and less flexible in responding
to changing business and economic conditions.

A failure to comply with the covenants and other provisions of
our debt instruments could result in events of default under
such instruments, which could permit acceleration of the
convertible notes under such instruments and in some cases
acceleration of any future debt under instruments that may
contain cross-default or cross-acceleration provisions. For
instance, as a result of the stock option investigation, in July
2007, the trustee of the convertible notes accelerated the
convertible notes due to an alleged event of default that had
occurred under the convertible notes because of the assertion
that we were not in compliance with the SEC reporting covenant.
While the trustee subsequently rescinded this acceleration and
waived all existing events of default under the indenture
governing the convertible notes, any required repayment of the
convertible notes would lower our current cash on hand such that
we would not have those funds available for the use in our
business.

If we are at any time unable to generate sufficient cash flow
from operations to service our indebtedness when payment is due,
we may be required to attempt to renegotiate the terms of the
instruments relating to the indebtedness, seek to refinance all
or a portion of the indebtedness or obtain additional financing.
There can be no assurance that we will be able to successfully
renegotiate such terms, that any such refinancing would be
possible or that any additional financing could be obtained on
terms that are favorable or acceptable to us.

Our certificate of incorporation, our bylaws, our stockholder
rights plan and Delaware law contain provisions that might
enable our management to discourage, delay or prevent change in
control. In addition, these provisions could limit the price
that investors would be willing to pay in the future for shares
of our Common Stock. Among these provisions are:



our board of directors is authorized, without prior stockholder
approval, to create and issue preferred stock, commonly referred
to as blank check preferred stock, with rights
senior to those of Common Stock;



our board of directors is staggered into two classes, only one
of which is elected at each annual meeting;



stockholder action by written consent is prohibited;



nominations for election to our board of directors and the
submission of matters to be acted upon by stockholders at a
meeting are subject to advance notice requirements;



certain provisions in our bylaws and certificate of
incorporation such as notice to stockholders, the ability to
call a stockholder meeting, advanced notice requirements and the
stockholders acting by written consent may only be amended with
the approval of stockholders holding 66
2/3%
of our outstanding voting stock;



the ability of our stockholders to call special meetings of
stockholders is prohibited; and

In addition, the provisions in our stockholder rights plan could
make it more difficult for a potential acquirer to consummate an
acquisition of our company. We are also subject to
Section 203 of the Delaware General Corporation Law, which
provides, subject to enumerated exceptions, that if a person
acquires 15% or more of our outstanding voting stock, the person
is an interested stockholder and may not engage in
any business combination with us for a period of
three years from the time the person acquired 15% or more of our
outstanding voting stock.

As of December 31, 2007, we occupied offices in the leased
facilities described below:

Number of Offices

Under Lease

Location

Primary Use

4

United States

Executive and administrative offices, research and development,
sales and marketing and service functions

Los Altos, CA (Headquarters)

Chapel Hill, NC

Mountain View, CA

Austin, TX

1

Bangalore, India

Administrative offices, research and development and service
functions

1

Tokyo, Japan

Business development

1

Taipei, Taiwan

Business development

1

Seoul, Korea

Business development

1

Pforzheim, Germany

Business development

In May 2006, we signed an agreement to lease a new office
facility in Bangalore, India into which we have consolidated all
of our Bangalore operations as of December 31, 2007.

Item 3.

Legal
Proceedings

For the information required by this item regarding legal
proceedings, see Note 16 Litigation and Asserted
Claims of Notes to Consolidated Financial Statements of
this
Form 10-K.

Item 4.

Submission
of Matters to a Vote of Security Holders

On December 19, 2007, Rambus held its 2007 Annual Meeting
of Stockholders. The matters voted upon at the meeting for
shareholders of record as of November 21, 2007 and the vote
with respect to each such matter are set forth below:

(i) Election of five Class II directors for a term of
two years expiring in 2009:

Our Common Stock is listed on The Nasdaq Global Select Market
under the symbol RMBS. The following table sets
forth for the periods indicated the high and low sales price per
share of our Common Stock as reported on The Nasdaq Global
Select Market.

Year Ended

Year Ended

December 31, 2007

December 31, 2006

High

Low

High

Low

First Quarter

$

23.95

$

17.31

$

40.22

$

17.50

Second Quarter

$

22.00

$

17.67

$

46.99

$

19.79

Third Quarter

$

19.60

$

12.05

$

25.38

$

10.25

Fourth Quarter

$

22.20

$

17.64

$

23.83

$

15.87

The graph below matches Rambus Inc.s cumulative
75-month
total shareholder return on Common Stock with the cumulative
total returns of the Nasdaq Composite index and the RDG
Semiconductor Composite index. The graph tracks the performance
of a $100 investment in our Common Stock and in each of the
indexes (with the reinvestment of all dividends) from
9/30/2001 to
12/31/2007.

Information regarding our securities authorized for issuance
under equity compensation plans will be included in
Item 12, Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters, of
this report on
Form 10-K.

As of January 31, 2008, there were 816 holders of record of
our Common Stock. Because many of the shares of our Common Stock
are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of
stockholders represented by these record holders. We have never
paid or declared any cash dividends on our Common Stock or other
securities and have no current plans to do so.

In October 2001, our Board of Directors approved a share
repurchase program of our Common Stock, principally to reduce
the dilutive effect of employee stock options. To date, our
Board of Directors has approved the authorization to repurchase
up to 19.0 million shares of our outstanding Common Stock
over an undefined period of time. As of December 31, 2007,
we had repurchased a cumulative total of 13.2 million
shares of our Common Stock at an average price per share of
$13.95 since the commencement of this program. As of
December 31, 2007, there remained an outstanding
authorization to repurchase 5.8 million shares of our
outstanding Common Stock. In connection with the completed stock
options investigation, repurchases of Common Stock under this
program were suspended as of July 19, 2006. We became
current with our SEC filings as of October 17, 2007, but
did not repurchase shares in 2007. During 2008, we began
repurchasing additional shares under the share repurchase
program. See Note 17 Subsequent Events of Notes
to Consolidated Financial Statements for more information.

Item 6.

Selected
Financial Data

The following selected consolidated financial data should be
read in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and Item 8, Financial Statements
and Supplementary Data, and other financial data included
elsewhere in this report. Our historical results of operations
are not necessarily indicative of results of operations to be
expected for any future period.

Managements
Discussion and Analysis of Financial Condition and Results of
Operations

This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
statements relate to our expectations for future events and time
periods. All statements other than statements of historical fact
are statements that could be deemed to be forward-looking
statements, including any statements regarding trends in future
revenues or results of operations, gross margin or operating
margin, expenses, earnings or losses from operations, synergies
or other financial items; any statements of the plans,
strategies and objectives of management for future operations;
any statements concerning developments, performance or industry
ranking; any statements regarding future economic conditions or
performance; any statements regarding pending investigations,
claims or disputes; any statements of expectation or belief; and
any statements of assumptions underlying any of the foregoing.
Generally, the words anticipate,
believes, plans, expects,
future, intends, may,
should, estimates, predicts,
potential, continue and similar
expressions identify forward-looking statements. Our
forward-looking statements are based on current expectations,
forecasts and assumptions and are subject to risks,
uncertainties and changes in condition, significance, value and
effect. As a result of the factors described herein, and in the
documents incorporated herein by reference, including, in
particular, those factors described under Risk
Factors, we undertake no obligation to publicly disclose
any revisions to these forward-looking statements to reflect
events or circumstances occurring subsequent to filing this
report with the Securities and Exchange Commission.

We design, develop and license chip interface technologies and
architectures that are foundational to nearly all digital
electronics products. Our chip interface technologies are
designed to improve the time-to-market, performance and
cost-effectiveness of our customers semiconductor and
system products for computing, communications and consumer
electronics applications.

As of December 31, 2007, our chip interface technologies
are covered by more than 680 U.S. and foreign patents.
Additionally, we have approximately 540 patent applications
pending. These patents and patent applications cover important
inventions in memory and logic chip interfaces, in addition to
other technologies. We believe that our chip interface
technologies provide a higher performance, lower risk, and more
cost-effective alternative for our customers than can be
achieved through their own internal research and development
efforts.

We offer our customers two alternatives for using our chip
interface technologies in their products:

First, we license our broad portfolio of patented inventions to
semiconductor and system companies who use these inventions in
the development and manufacture of their own products. Such
licensing agreements may cover the license of part, or all, of
our patent portfolio. Patent license agreements are royalty
bearing.

Second, we develop leadership (which are
Rambus-proprietary products widely licensed to our customers)
and industry-standard chip interface products that we provide to
our customers under license for incorporation into their
semiconductor and system products. Because of the often complex
nature of implementing state-of-the art chip interface
technology, we offer our customers a range of engineering
services to help them successfully integrate our chip interface
products into their semiconductors and systems. Product license
agreements may have both a fixed price (non-recurring) component
and ongoing royalties. Engineering services are customarily
bundled with our product licenses, and are performed on a fixed
price basis. Further, under product licenses, our customers may
receive licenses to our patents necessary to implement the chip
interface in their products with specific rights and
restrictions to the applicable patents elaborated in their
individual contracts with us.

We derive the majority of our annual revenues by licensing our
broad portfolio of patents for chip interfaces to our customers.
Such licenses may cover part or all of our patent portfolio.
Leading semiconductor and system companies such as AMD, Elpida,
Fujitsu, Qimonda, Intel, Matsushita, NECEL, Renesas, Spansion
and Toshiba have licensed our patents for use in their own
products.

We derive additional revenues by licensing our leadership and
industry-standard chip interface products to our customers for
use in their semiconductor and system products. Our customers
include leading companies such as Fujitsu, Elpida, IBM, Intel,
Matsushita, Texas Instruments, Sony, ST Micro, Qimonda and
Toshiba. Due to the complex nature of implementing our
technologies, we provide engineering services under certain of
these licenses

to help successfully integrate our chip interface products into
their semiconductors and systems. Additionally, product
licensees may receive, as an adjunct to their chip interface
license agreements, patent licenses as necessary to implement
the chip interface in their products with specific rights and
restrictions to the applicable patents elaborated in their
individual contracts.

Royalties represent a substantial portion of our total revenues.
The remaining part of our revenue is engineering services
revenue which includes license fees and engineering services
fees. The timing and amounts invoiced to customers can vary
significantly depending on specific contract terms and can
therefore have a significant impact on deferred revenues or
unbilled receivables in any given period.

We have a high degree of revenue concentration, with our top
five licensees representing approximately 67%, 63% and 73% of
our revenues for the years ended December 31, 2007, 2006
and 2005, respectively. For the year ended December 31,
2007, revenues from Fujitsu, Elpida, Qimonda and Toshiba, each
accounted for 10% or more of total revenues. For the year ended
December 31, 2006, revenues from Fujitsu, Elpida, Qimonda
and Intel, each accounted for 10% or more of total revenues. For
the year ended December 31, 2005, revenue from Intel,
Elpida, Toshiba and Matsushita, each accounted for 10% or more
of our total revenues.

Our revenue from companies headquartered outside of the United
States accounted for approximately 85%, 75% and 71% of our total
revenues for the years ended December 31, 2007, 2006 and
2005, respectively. We expect that we may continue to experience
significant revenue concentration and have significant revenues
from sources outside the United States for the foreseeable
future.

Historically, we have been involved in significant litigation
stemming from the unlicensed use of our inventions. Our
litigation expenses have been high and difficult to predict and
we anticipate future litigation expenses to continue to be
significant, volatile and difficult to predict. If we are
successful in the litigation
and/or
related licensing, our revenue could be substantially higher in
the future; if we are unsuccessful, our revenue would likely
decline.

As indicated above, we have a high degree of revenue
concentration. Many of our licensees have the right to cancel
their licenses. The particular licensees which account for
revenue concentration have varied from period to period as a
result of the addition of new contracts, expiration of existing
contracts, industry consolidation, the expiration of deferred
revenue schedules under existing contracts, and the volumes and
prices at which the licensees have recently sold licensed
semiconductors to system companies. These variations are
expected to continue in the foreseeable future, although we
expect that our revenue concentration will decrease over time as
we license new customers.

The royalties we receive are partly a function of the adoption
of our chip interfaces by system companies. Many system
companies purchase semiconductors containing our chip interfaces
from our licensees and do not have a direct contractual
relationship with us. Our licensees generally do not provide us
with details as to the identity or volume of licensed
semiconductors purchased by particular system companies. As a
result, we face difficulty in analyzing the extent to which our
future revenues will be dependent upon particular system
companies. System companies face intense competitive pressure in
their markets, which are characterized by extreme volatility,
frequent new product introductions and rapidly shifting consumer
preferences. There can be no assurance as to the unit volumes of
licensed semiconductors that will be purchased by these
companies in the future or as to the level of royalty-bearing
revenues that our licensees will receive from sales to these
companies. Additionally, there can be no assurance that a
significant number of other system companies will adopt our chip
interfaces or that our dependence upon particular system
companies will decrease in the future.

We expect that revenues derived from international licensees
will continue to represent a significant portion of our total
revenues in the future. To date, all of the revenues from
international licensees have been denominated in
U.S. dollars. However, to the extent that such
licensees sales to systems companies are not denominated
in U.S. dollars, any royalties that we receive as a result
of such sales could be subject to fluctuations in currency

exchange rates. In addition, if the effective price of licensed
semiconductors sold by our foreign licensees were to increase as
a result of fluctuations in the exchange rate of the relevant
currencies, demand for licensed semiconductors could fall, which
in turn would reduce our royalties. We do not use financial
instruments to hedge foreign exchange rate risk.

For additional information concerning international revenues,
see Note 12, Business Segments, Exports and Major
Customers of Notes to Consolidated Financial Statements of
this
Form 10-K.

We intend to continue making significant expenditures associated
with engineering, marketing, general and administration
including litigation expenses, and expect that these costs and
expenses will continue to be a significant percentage of
revenues in future periods. Whether such expenses increase or
decrease as a percentage of revenues will be substantially
dependent upon the rate at which our revenues change.

Engineering. Engineering costs are allocated
between cost of contract revenues and research and development
expenses. Cost of contract revenues reflects the portion of the
total engineering costs which are specifically devoted to
individual licensee development and support services. The
balance of engineering costs, incurred for the development of
generally applicable chip interface technologies, is charged to
research and development. In a given period, the allocation of
engineering costs between these two components is a function of
the timing of the development and implementation schedules of
individual licensee contracts.

Marketing, general and
administrative. Marketing, general and
administrative expenses include expenses and costs associated
with trade shows, public relations, advertising, legal, finance,
insurance and other marketing and administrative efforts.
Litigation expenses are a significant portion of our marketing,
general and administrative expenses and they can vary
significantly from quarter to quarter. Consistent with our
business model, sales and marketing activities are focused on
developing relationships with potential licensees and on
participating with existing licensees in marketing, sales and
technical efforts directed to system companies. In many cases,
we must dedicate substantial resources to the marketing and
support of system companies. Due to the long business
development cycles we face and the semi-fixed nature of
marketing, general and administrative expenses in a given
period, these expenses generally do not correlate to the level
of revenues in that period or in recent or future periods.

Costs of restatement and related legal
activities. Costs of restatement and related
legal activities consist primarily of investigation, audit,
legal and other professional fees related to the
2006  2007 stock option investigation, the filing of
the restated financial statements and related litigation.

Taxes. We report certain items of income and
expense for financial reporting purposes in different years than
they are reported for tax purposes. We recognize revenue for
financial reporting purposes as such amounts are earned and this
could occur over several reporting periods. As a result of the
above and other differences between tax and financial reporting
for income and expense recognition, our net operating profit or
loss for tax purposes may be more or less than the amount
recorded for financial reporting purposes. In addition, we
maintain reserves for uncertain tax positions under FASB
Interpretation (FIN) 48, Accounting for
Uncertainty in Income Taxes  an interpretation
of FASB Statement No. 109, Accounting for Income
Taxes.

In the years ended December 31, 2007, 2006 and 2005, our
largest source of royalties was related to the license of our
patents for SDR and DDR-compatible products. Royalties decreased
approximately $3.8 million for SDR and DDR-compatible
products in the year ended December 31, 2007 as compared to
the same period in 2006. The decrease is primarily due to
decreased revenue in 2007 from AMD, Qimonda and NEC, partially
offset by increased royalties from Toshiba, Fujitsu and
Spansion. Royalties increased approximately $56.0 million
for SDR and DDR-compatible products in the year ended
December 31, 2006 as compared to the same period in 2005.
The increase was primarily due to revenue from licensees signed
in 2005 and the first quarter of 2006, including Fujitsu, AMD
and Qimonda, partially offset by decreased royalties from
Samsung and Matsushita.

As of December 31, 2007, we had both variable and fixed
royalty agreements for our SDR and DDR-compatible licenses. On
December 31, 2005, we entered into a five-year patent
license agreement with AMD. We are recognizing royalty revenues
under the AMD agreement on a quarterly basis as amounts become
due and

payment is received because the contractual terms of the
agreement provide for payments on an extended term basis. We
recognized royalty revenues of $15.0 million and
18.8 million in 2007 and 2006, respectively, and we expect
to recognize royalty revenues of $15.0 million in 2008
through 2009 and $11.3 million in 2010 under the AMD
agreement. The AMD agreement provides a license of our patented
technology used in the design of DDR2, DDR3, FB-DIMM, PCI
Express and XDR controllers as well as other current and future
high-speed memory and logic controller interfaces.

On March 16, 2006, we entered into a five-year patent
license agreement with Fujitsu. We expect to recognize royalty
revenues under the Fujitsu agreement on a quarterly basis as
amounts become due and payment is received as the contractual
terms of the agreement provide for payments on an extended term
basis. We recognized a total of $36.5 million and
$34.8 million of royalty revenues in 2007 and 2006,
respectively. The Fujitsu agreement provides a license that
covers semiconductors, components and systems, but does not
include a license to Fujitsu for its own manufacturing of
commodity SDRAM other than limited amounts of SDR SDRAM annually.

On March 21, 2005, we entered into a settlement and license
agreement with Infineon (and its former parent Siemens), which
was assigned to Qimonda in October 2006 in connection with
Infineons spin-off of Qimonda. The settlement and license
agreement, among other things, requires Qimonda to pay to us
aggregate royalties of $50.0 million in quarterly
installments of approximately $5.8 million, which started
on November 15, 2005. The settlement and license agreement
further provides that if we enter into licenses with certain
other DRAM manufacturers, Qimonda will be required to make
additional royalty payments to us that may aggregate up to
$100.0 million. As we have not yet succeeded in entering
into these additional license agreements necessary to trigger
Qimondas obligations, Qimondas quarterly payment
decreased to $3.2 million in the fourth quarter of 2007 and
has ceased in the first quarter of 2008. The quarterly payments
with Qimonda will not recommence until we enter into additional
license agreements with certain other DRAM manufacturers.

We are in negotiations with new prospective licensees. We expect
SDR and DDR-compatible royalties will continue to vary from
period to period based on our success in renewing existing
license agreements and adding new licensees, as well as the
level of variation in our licensees reported shipment
volumes, sales price and mix, offset in part by the proportion
of licensee payments that are fixed.

There was no royalty revenue recorded from the Intel patent
cross-license in the year ended December 31, 2007, because
the term of the agreement expired in June 2006. The Intel patent
cross-license agreement represented the second largest source of
royalties in the years ended December 31, 2006 and 2005.
Royalties under this agreement decreased from $40.0 million
to $20.0 million for the year ended December 31, 2006
compared to the same period in 2005.

On February 2, 2007, the Federal Trade Commission (the
FTC) issued an order requiring us to limit the
royalty rates charged for certain SDR and DDR SDRAM memory and
controller products sold after April 12, 2007. The FTC
stayed this requirement on March 16, 2007, subject to
certain conditions. One such condition of the stay limits the
royalties we can receive under certain contracts so that they do
not exceed the FTCs Maximum Allowable Royalties
(MAR). We are using our best efforts to comply with
these orders. Amounts in excess of MAR that are subject to the
order are excluded from revenue. As of December 31, 2007,
$2.4 million has been excluded from revenue. Depending on
the final resolution of the appeal, we may or may not be able to
recognize any excess amounts as additional revenue.

In the year ended December 31, 2007, royalties from XDR,
FlexIO, DDR and serial link-compatible products represented the
second largest category of royalties. Royalties from these
products increased approximately $7.0 million during the
year ended December 31, 2007 as compared to the same period
in 2006.

In the year ended December 31, 2007, royalties from
RDRAM-compatible products represented the third largest source
of royalties. Royalties from RDRAM memory chips and controllers
increased $2.2 million during the year ended
December 31, 2007 as compared to the same period in 2006.

In the years ended December 31, 2006 and 2005, royalties
from RDRAM-compatible products represented the third largest
source of royalties. Royalties from RDRAM memory chips and
controllers decreased approximately $1.2 million during the
year ended December 31, 2006 as compared to the same period
in 2005.

Royalties from XDR, FlexIO, DDR and serial link-compatible
products represent the fourth largest category of royalties.
Royalties from XDR and serial link-compatible products increased
approximately $3.8 million during the year ended
December 31, 2006 as compared to the same period in 2005.
The increase of XDR and serial link-compatible products for 2006
over 2005 is primarily due to increased volumes of XDR DRAM
associated with shipments of the Sony
PLAYSTATION®3
product.

In the future, we expect royalties from XDR, FlexIO, DDR and
serial link-compatible products will continue to vary from
period to period based on our licensees shipment volumes,
sales prices, and product mix.

Percentage of completion contract revenue increased
approximately $2.1 million for the year ended
December 31, 2007 as compared to the year ended
December 31, 2006. The increase is due to increased revenue
from leadership and industry standard chip interface contracts.

For the year ended December 31, 2006 as compared to the
year ended December 31, 2005, percentage-of-completion
contract revenue decreased approximately $8.2 million due
to completion of leadership chip interface contracts during
2005, including XDR and FlexIO.

We believe that percentage-of-completion contract revenues
recognized will continue to fluctuate over time based on our
ongoing contractual requirements, the amount of work performed,
and by changes to work required, as well as new contracts booked
in the future.

Other contracts revenue decreased approximately
$2.8 million for the year ended December 31, 2007 as
compared to the same period in 2006 primarily due to decreased
revenue from industry standard chip interface contracts offset
by increased revenue from leadership contracts.

For the year ended December 31, 2006 as compared to the
same period in 2005, revenue which is recognized over the
estimated service periods or on a completed contract basis
increased approximately $7.7 million due to increased
revenue from industry standard and leadership chip interface
contracts.

We believe that other contracts revenue will continue to
fluctuate over time based on our ongoing contract requirements,
the timing of completing engineering deliverables, as well as
new contracts booked in the future.

For the year ended December 31, 2007 as compared to the
same period in 2006, engineering costs increased primarily due
to expenses associated with tax reimbursement expenses of
approximately $4.1 million, increased compensation expenses
of $3.1 million associated with an increase in headcount,
increased amortization expense of design software maintenance of
$2.1 million and increased information technology expenses
of approximately $1.6 million offset in part by a decrease
in total stock-based compensation expense of $0.9 million.
The tax reimbursement expenses are associated with our decision
to reimburse current employees for the Internal Revenue Code
Section 409A penalty taxes imposed on them in connection
with their exercise of repriced options in 2006. Additionally,
stock-based compensation expenses include the effect of a change
in our estimated forfeiture rates for awards outstanding.

In certain periods, the cost of contract revenues may exceed
contract revenues that do not factor in the expected stream of
future royalty payments. This can be further impacted by
expensing of pre-contract costs, and completed contract costs
where the realizability of an asset is uncertain, and low
utilization of project resources. During the quarter ended
December 31, 2007, we recognized an expense of
approximately $1.2 million related to an estimated loss
contract. These expenditures were recognized in the consolidated
statement of operations in cost of contract revenues during the
fourth quarter of 2007 when such loss was determined.
Additionally, cost of contract revenues exceeded contract
revenues partially due to stock-based compensation expense of
$5.9 million recognized during 2007.

For the year ended December 31, 2006 as compared to the
same period in 2005, the increase in total engineering costs was
primarily a result of increased stock-based compensation
(approximately $11.1 million) associated with the adoption
of SFAS No. 123(R) in 2006, increased salary and
benefit costs (approximately $6.7 million) associated with
an average increase of approximately 52 employees,
increased bonus expense (approximately $3.3 million) due to
higher achievement of bonus targets and an increased number of
participants in the corporate bonus plan, increased information
technology costs due to spending related to personnel,
consulting and depreciation (approximately $2.2 million)
increased depreciation and intangible amortization expense
(approximately $2.0 million) higher payroll taxes
(approximately $0.7 million) associated with higher stock
option exercises in the first half of 2006 and increased salary
costs.

In the near term, we expect engineering expenses will continue
to increase as we make investments in the infrastructure and
technologies required to maintain our leadership position in
chip interface technologies and increase headcount.

For the year ended December 31, 2007 as compared to the
same period in 2006, the increase in total marketing, general
and administrative costs was primarily due to higher stock-based
compensation expense of $5.2 million, professional and
consulting fees of $4.1 million, payroll costs associated
with $3.3 million of severance expense, approximately
$2.5 million of tax reimbursement expenses associated with
Internal Revenue Code Section 409A and increased litigation
expenses of $0.6 million (which includes an increase of
general litigation expenses of $10.6 million in 2007,
offset by a one-time bonus of $10.0 million paid to a law
firm in 2006). The tax reimbursement expenses are associated
with our decision to reimburse current and former non-executive
employees for the Internal Revenue Code Section 409A
penalty taxes imposed on them in connection with their exercise
of

repriced options in 2006. Additionally, stock-based compensation
expenses include the effect of a change in our estimated
forfeiture rates for awards outstanding as well as the effect of
performance based restricted stock units. Costs of restatement
and related legal activities are discussed in the next section.

For the year ended December 31, 2006 as compared to the
same period in 2005, the increase in total marketing, general
and administrative costs was primarily a result of increased
stock-based compensation costs (approximately $9.0 million)
associated with the adoption of SFAS No. 123(R) in
2006, increased salary costs (approximately $5.6 million)
associated with an average increase of approximately
37 employees (29 in the U.S. and 8 internationally),
increased bonus expense (approximately $3.2 million) due to
higher achievement of bonus targets and an increased number of
participants in the corporate bonus plan, increased consulting
costs (approximately $1.2 million), higher payroll taxes
(approximately $1.1 million) associated with payroll tax
withholding liability for certain repriced stock grants that no
longer qualify for incentive stock option tax treatment in the
first half of 2006 and increased salary costs, increased
depreciation and intangible amortization expense (approximately
$1.0 million) increased litigation expense (approximately
$0.7 million) and increased rent expense (approximately
$0.7 million). Costs of restatement and related legal
activities are discussed in the next section.

In the future, marketing, general and administrative expenses
will vary from period to period based on the trade shows,
advertising, legal, and other marketing and administrative
activities undertaken, and the change in sales, marketing and
administrative headcount in any given period. Litigation
expenses are expected to continue to be at or above the 2007
expense levels due to the current high level of litigation
activity.

Costs of restatement and related legal activities consist
primarily of investigation, audit, legal and other professional
fees related to the 2006-2007 stock option investigation and the
filing of the restated financial statements and related
litigation.

For the year ended December 31, 2007 as compared to the
same period in 2006, the decrease in costs of restatement and
related legal activities was primarily associated with the
one-time accrual of $18.0 million in the third quarter of
2006 related to the potential settlement of the consolidated
class action lawsuit pertaining to the accounting for stock
option grants and related disclosures, offset in part by higher
accounting and audit fees and consulting expenses of
$6.0 million in 2007 relating to the filing of our restated
financial statements in late 2007.

For the year ended December 31, 2006 we incurred
approximately $31.4 million in costs of restatement and
related legal activities. There were no comparable costs
incurred for the year ended December 31, 2005. The costs
consist primarily of settlement accruals, including the accrual
of $18.0 million in the third quarter of 2006 related to
the potential settlement of the consolidated class action
lawsuit pertaining to the accounting for stock option grants and
related disclosures, plus investigation, audit, litigation and
other professional fees. The Company expects to continue to
incur restatement related litigation costs in the future arising
from stock options investigation related claims.

Interest and other income, net:

Years Ended December 31,

2006 to 2007

2005 to 2006

2007

2006

2005

Change

Change

(Dollars in millions)

Interest and other income, net

$

21.8

$

14.3

$

34.8

51.8

%

(58.9

)%

Interest and other income, net consists primarily of interest
income generated from investments in high quality fixed income
securities. For the year ended December 31, 2007 as
compared to the same period in 2006, the increase in interest
and other income, net was primarily due to higher investment
yields and higher average cash and

investment balances. In addition, the year ended 2006 included
amortization of note issuance costs of $3.2 million,
including $2.4 million that was accelerated into the fourth
quarter of 2006, in connection with the calling of the
$160.0 million in convertible notes.

For the year ended December 31, 2006 as compared to the
same period in 2005, the decrease in interest and other income,
net consists primarily of gains on the repurchases of the
outstanding convertible notes in 2005, that were issued in the
first quarter of 2005 (approximately $24.0 million), offset
in part by higher interest income primarily due to higher cash
and marketable securities balances and higher interest rates
(approximately $5.7 million) in 2006. Year ended 2006
interest and other income, net also includes $3.2 million
of amortization of note issuance costs, including
$2.4 million that was accelerated into the fourth quarter
of 2006, in connection with the calling of the
$160.0 million in convertible notes (see Note 15
Convertible Notes of Notes to Consolidated Financial
Statements for more information).

In the future, we expect that interest and other income, net
will vary from period to period based on the amount of cash and
marketable securities and interest rates.

The 2007 tax rate is higher than the benefit calculated using
the U.S. statutory tax rate primarily due to research and
development tax credits, stock-based compensation expense
associated with executives and state income taxes. The 2006 tax
rate is higher than the U.S. statutory tax rate primarily due to
research and development tax credits, partially offset by the
lack of deductibility of certain stock-based compensation
expense associated with executives. The 2005 tax rate is lower
than the U.S. statutory tax rate primarily due to the tax
benefit from stock-based compensation expense associated with
executives.

In the year ended December 31, 2007, our net deferred tax
assets increased by $18.2 million to $127.8 million,
primarily due to the net increase in future tax benefits related
to employee stock related compensation, additional tax credits
and net operating losses unrelated to stock option windfall
benefits, offset by a decrease in future tax benefits related to
depreciation and amortization. Additional information regarding
our deferred tax asset is set forth below in this Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations under the heading Critical
Accounting Policies and Estimates  Income Taxes
and is incorporated herein by reference.

Pursuant to Footnote 82 of SFAS No. 123(R), tax
attributes related to stock option windfall deductions should
not be recorded until they result in a reduction of cash taxes
payable. Starting in 2006, we no longer include net operating
losses attributable to stock option windfall deductions as
components of our gross deferred tax assets. The benefit of
these net operating losses will be recorded to equity when they
reduce cash taxes payable.

We derive our liquidity and capital resources primarily from our
cash flows from operations. We continue to generate positive
operating cash flows. We currently use cash generated from
operations for capital expenditures and investments . Based on
past performance and current expectations, we believe our
current available sources of funds including cash, cash
equivalents, and marketable securities, plus the anticipated
cash generated from operations, will be adequate to finance our
operations, capital expenditures and stock repurchases for at
least the next year.

Our positive cash flows from operating activities of
$6.5 million in the year ended December 31, 2007 were
primarily attributable to a net loss of $27.7 million
adjusted for $44.8 million of stock-based compensation
expense and $16.5 million of depreciation and amortization
expense, $0.4 million in loss on disposal of property and
equipment (including approximately $0.3 million in write
off of leasehold improvements related to the closure of our
previous India office), offset by cash outflows of
$5.7 million primarily from changes in our working capital,
including the tax reimbursement expenses associated with our
decision to reimburse current and former non-executive employees
for the Internal Revenue Code Section 409A penalty taxes
imposed on them in connection with their exercise of repriced
options in 2006. Non-cash working capital changes primarily
relate to a deferred tax benefit of $21.9 million, a
$4.8 million net decrease in deferred revenue and a
$4.4 million decrease in accrued salaries and benefits and
other accrued liabilities, offset by a $0.7 million
decrease in accounts receivable, a $5.1 million increase in
accounts payable, a $3.1 million increase in accrued
litigation expenses and a $0.8 million increase in income
taxes payable.

Cash generated by operating activities in the year ended
December 31, 2006 was $63.4 million primarily as a
result of a net loss of $13.8 million, adjusted for certain
non-cash items, including increases resulting from stock-based
compensation expense of $40.5 million, depreciation of
$11.2 million, amortization of intangible assets of
$5.2 million, amortization of $3.2 million of note
issuance costs, including an additional $2.4 million in
connection with the notice of acceleration relating to the
$160.0 million of our convertible notes. In addition, cash
generated by operating activities was positively impacted by a
$6.1 million increase in accounts payable, a
$7.2 million increase in accrued salaries and benefits and
other accrued liabilities, a $18.5 million increase in
accrued litigation expenses and a $0.1 million increase in
income taxes payable. Cash generated by operating activities was
partially offset by an increase in deferred taxes of
$11.2 million, an increase in accounts receivable and
unbilled receivables of $1.6 million, an increase in
prepaid expenses and other assets of $0.7 million and a net
increase in deferred revenue of $1.7 million.

Cash generated by operating activities was $33.8 million in
the year ended December 31, 2005, and was primarily the
result of net income of $28.9 million adjusted for certain
non-cash items, including depreciation of $9.1 million,
amortization of note issuance costs of $1.1 million,
amortization of intangible assets of $4.3 million,
stock-based compensation of $20.5 million, tax benefit of
stock options of $0.7 million, and loss on disposal of
assets of $0.2 million, offset by a $24.0 million gain
on repurchase of convertible notes. Operating activities were
also affected by a decrease in accounts receivable of
$0.5 million, a $6.5 million increase in deferred tax
provision, a $2.5 million increase in accrued salaries and
benefits and other accrued liabilities and a $1.4 million
increase in accrued litigation expenses, offset by a
$0.5 million increase in prepaid expenses and other assets,
a $2.5 million decrease in accounts payable and a
$0.5 million decrease in income taxes payable. This cash
generated from operating activities was partially offset by a
net decrease in deferred revenue of $14.5 million resulting
from

Cash provided by investing activities of approximately
$31.9 million in the year ended December 31, 2007
primarily consisted of proceeds from the maturities of
available-for-sale marketable securities of $707.1 million,
partially offset by purchases of available-for-sale marketable
securities of $664.4 million, and additional consideration
paid of $1.1 million on the acquisition of GDA.
Additionally, we purchased $7.0 million of primarily
computer software and $2.6 million of leasehold
improvements.

Cash used in investing activities was $68.3 million in the
year ended December 31, 2006, and primarily consisted of
purchases of marketable securities of $215.2 million,
offset by maturities of $166.2 million. In addition,
$1.0 million was used to acquire certain proprietary assets
from GDA, $0.3 million was used to purchase intangible
assets, $14.9 million was used to acquire property and
equipment, primarily computer and software and $3.1 million
was used to acquire leasehold improvements.

Cash used in investing activities was $139.3 million in the
year ended December 31, 2005, and primarily consisted of
purchases of marketable securities of $347.7 million
resulting from the investment of a portion of the net proceeds
from the issuance of convertible notes, offset by maturities of
$222.1 million. In addition, $5.4 million was used to
acquire certain proprietary digital core designs from GDA,
$2.5 million was used to acquire certain serial link
intellectual property assets from Cadence and $8.6 million
was used for the purchase of property and equipment, including
computer and software purchases in the United States and
computer equipment, software, leasehold improvements and office
equipment and furniture for a new facility in India. The change
is partially offset by a reduction in restricted cash of
$2.8 million due to the settlement in the Infineon case,
which removed the restrictions on these assets.

Net cash provided by financing activities was $7.6 million
in the year ended December 31, 2007. We received proceeds
from the issuance of stock from the exercise of stock options
and purchases under our employee stock purchase plan of
$11.8 million during the fourth quarter of the year and
paid $4.3 million under installment payment plans used to
acquire software license agreements. No other significant
financing activities occurred during the year primarily due to
the stock option investigation and restatement, during which we
suspended our common stock repurchase program and suspended
employee stock option exercises and purchases under our employee
stock purchase plan.

Net cash provided by financing activities was $35.8 million
in the year ended December 31, 2006. We received net
proceeds of $57.6 million from the issuance of Common Stock
associated with exercises of employee stock options and Common
Stock issued under our employee stock purchase plan, partially
offset by repurchases of our Common Stock of $21.0 million.
In addition, we made a $0.8 million installment payment.

Net cash provided by financing activities was $99.7 million
in the year ended December 31, 2005. We received net
proceeds from the issuance of convertible notes of
$292.8 million and net proceeds from the issuance of Common
Stock associated with exercises of employee stock options and
Common Stock issued under our employee stock purchase plan of
$8.5 million. This cash provided from the issuance of
convertible notes and Common Stock was partially offset by the
repurchase of our Common Stock of $88.2 million and the
repurchases of outstanding convertible notes of
$113.0 million. In addition, we repaid approximately
$0.4 million against an installment payment plan totalling
$2.8 million used to acquire capitalized software.

We currently anticipate that existing cash and cash equivalent
balances and cash flows from our operating activities will be
adequate to meet our cash needs for at least the next
12 months. Additionally, we have begun repurchasing
additional shares in 2008 under our share repurchase program
which will adversely impact our cash balances. As described
elsewhere in this Managements Discussion and
Analysis of Financial Condition and Results of Operations
and this report, we are involved in ongoing litigation related
to our intellectual property and

our past stock option investigation. Any adverse settlements or
judgments in this litigation could have a material adverse
impact on our results of operations, cash balances and cash
flows in the period in which such events occur.

We lease our present office facilities in Los Altos, California,
under an operating lease agreement through December 31,
2010. As part of this lease transaction, we provided a letter of
credit restricting $600,000 of our cash as collateral for
certain obligations under the lease. The cash is restricted as
to withdrawal and is managed by a third party subject to certain
limitations under our investment policy. We also lease a
facility in Mountain View, California, through November 11,
2009, a facility in Chapel Hill, North Carolina through
November 15, 2009 and a facility for our design center in
Bangalore, India through November 30, 2012. We also lease
office facilities in Austin, Texas and various international
locations under non-cancelable leases that range in terms from
month-to-month to one year.

In May 2006, we signed an agreement to lease a new office
facility in Bangalore, India into which we have consolidated all
of our Bangalore operations as of December 31, 2007.

As discussed more fully in Note 15, Convertible
Notes of the Notes to Consolidated Financial Statements,
we have $160.0 million zero coupon convertible senior notes
(the convertible notes) outstanding at
December 31, 2007.

In connection with certain German litigation, the German courts
have requested that we set aside adequate funds to cover
potential court cost claims. Accordingly, approximately
$1.7 million is restricted as to withdrawal, managed by a
third party subject to certain limitations under our investment
policy and included in restricted cash to cover the German court
requirements.

As of December 31, 2007, our material contractual
obligations are:

Payment Due by Year

Total

2008

2009

2010

2011

2012

Thereafter

(In thousands)

Contractual obligations(1)

Operating leases

$

20,720

$

7,308

$

6,418

$

5,743

$

620

$

631

$



Convertible notes

160,000





160,000







Purchased software license agreements(2)

3,554

3,554











Total

$

184,274

$

10,862

$

6,418

$

165,743

$

620

$

631

$



(1)

The above table does not reflect possible payments in connection
with uncertain tax benefits associated with FIN 48 of
approximately $14.0 million as of December 31, 2007.
As noted in Note 10, Income Taxes, of the Notes
to Consolidated Financial Statements, although it is possible
that some of the unrecognized tax benefits could be settled
within the next 12 months, we cannot reasonably estimate
the outcome at this time.

(2)

We have commitments with various software vendors for
non-cancellable license agreements that generally have terms
longer than one year. The above table summarizes those
contractual obligations as of December 31, 2007, which are
also included on our consolidated balance sheets under current
and other long-term liabilities.

In October 1998, our Board of Directors authorized an incentive
program in the form of warrants for a total of up to
1,600,000 shares of our Common Stock to be issued to
various RDRAM licensees. The warrants, which were issued at the
time certain targets were met, had an exercise price of $2.50
per share and a life of five years from the date of issuance.
These warrants were to vest and become exercisable only upon the
achievement of certain milestones by Intel relating to shipment
volumes of RDRAM chipsets. Warrants exercisable for a total of

1,520,000 shares of our Common Stock had been issued under
the program. As of December 31, 2007, no warrants were
exercised as the defined milestones were not achieved, and all
warrants have now expired.

As of December 31, 2006, there were 721,846 contingent
unvested options, which vest upon the achievement of certain
milestones by Intel relating to shipment volumes of RDRAM 850E
chipsets. Intel has since phased out the 850E chipset and as a
result the unvested options will never vest. These contingent
unvested options were granted in 1999 and 2001 with a term of
10 years.

As of December 31, 2007, 86,498 contingent unvested options
were forfeited. As of December 31, 2007, there were 635,348
contingent unvested options. As noted above, none are expected
to vest.

In October 2001, our Board of Directors approved a share
repurchase program of our Common Stock, principally to reduce
the dilutive effect of employee stock options. To date, our
Board of Directors has approved the authorization to repurchase
up to 19.0 million shares of our outstanding Common Stock
over an undefined period of time. As of December 31, 2007,
we had repurchased a cumulative total of 13.2 million
shares of our Common Stock at an average price per share of
$13.95 since the commencement of this program. As of
December 31, 2007, there remained an outstanding
authorization to repurchase 5.8 million shares of our
outstanding Common Stock. In connection with the completed stock
options investigation, repurchases of Common Stock under this
program were suspended as of July 19, 2006. We became
current with our SEC filings as of October 17, 2007, but
did not repurchase shares in 2007. During 2008, we began
repurchasing additional shares under the share repurchase
program. See Note 17, Subsequent Events, of
Notes to Consolidated Financial Statements for more information.

On May 30, 2006, the Audit Committee commenced an internal
investigation of the timing of past stock option grants and
related accounting issues.

On May 31, 2006, the first of three shareholder derivative
actions was filed in the Northern District of California against
Rambus (as a nominal defendant) and certain current and former
executives and board members. On August 9, 2006, these
actions were consolidated for all purposes under the caption,
In re Rambus Inc. Derivative Litigation, Master File
No. C-06-3513-JF
(N.D. Cal.), and Howard Chu and Gaetano Ruggieri were appointed
lead plaintiffs. On October 2, 2006, a consolidated
complaint was filed. On November 3, 2006, plaintiffs filed
an amended consolidated complaint. The consolidated complaint,
as amended, alleges violations of certain federal and state
securities laws as well as other state law causes of action. The
complaint seeks disgorgement and damages in an unspecified
amount, unspecified equitable relief, and attorneys fees
and costs.

On August 22, 2006, another shareholder derivative action
was filed in Delaware Chancery Court against Rambus (as a
nominal defendant) and certain current and former executives and
board members (Bell v. Tate et al., 2366-N (Del.
Chancery)). Pursuant to agreement of the parties, no deadline
for Rambus to respond to the complaint has been set.

On August 30, 2007, another shareholder derivative action
was filed in the Southern District of New York against Rambus
(as a nominal defendant) and PricewaterhouseCoopers LLP
(Francl v. PricewaterhouseCoopers LLP et al.,
No. 07-Civ.
7650 (GBD)). On November 21, 2007, the New York court
granted PricewaterhouseCoopers LLPs motion to transfer the
action to the Northern District of California. The case has not
yet been docketed in the Northern District of California.

The Special Litigation Committee (SLC) has concluded
its review of claims relating to stock option practices that are
asserted in derivative actions against a number of our present
and former officers and directors. The SLC has determined that
all claims should be terminated and dismissed against the named
defendants in the derivative actions with the exception of
claims against Ed Larsen, who served as Vice President, Human
Resources

from September 1996 until December 1999, and then Senior Vice
President, Administration until July 2004. The SLC has entered
into settlement agreements with certain of our former officers.
These settlements are conditioned upon the dismissal of the
claims asserted against these individuals in In re Rambus
Inc. Derivative Litigation. The aggregate value of the
settlements to us exceeds $6.5 million in cash and
estimated equivalent value, as well as substantial additional
value to us relating to the relinquishment of claims to over
2.7 million stock options. On August 24, 2007, the
written report setting forth the findings of the SLC was filed
with the U.S. District Court for the Northern District of
California. The conclusions of the SLC are subject to review by
the court. On October 5, 2007, Rambus filed a motion to
terminate in accordance with the SLCs recommendations. A
hearing on this motion is scheduled for May 9, 2008.

On July 17, 2006, the first of six class action lawsuits
was filed in the Northern District of California against Rambus
and certain current and former executives and board members. On
September 26, 2006, these class action suits were
consolidated under the caption, In re Rambus Inc. Securities
Litigation, C-06-4346-JF (N.D. Cal.). On November 9,
2006, Ronald L. Schwarcz was appointed lead plaintiff. An
amended consolidated complaint was filed on February 14,
2007, naming as defendants Rambus, certain of its current and
former executives and board members, and PricewaterhouseCoopers
LLP. The complaint alleges violations of various federal
securities laws. The complaint seeks damages in an unspecified
amount as well as attorneys fees and costs. On
April 2, 2007, Rambus and certain individual defendants
filed a motion to dismiss the lawsuit. PricewaterhouseCoopers
LLP filed a motion to dismiss on May 7, 2007. Per agreement
of the parties, briefing on the motions to dismiss was
suspended, and the motions were taken off calendar. Subject to
court approval, the parties have agreed in principle to resolve
this dispute. The settlement, which is subject to final
documentation as well as review by the California court,
provides for a payment by Rambus of $18.0 million and would
lead to a dismissal with prejudice of all claims against all
defendants in the class action litigation. See Note 16
Litigation and Asserted Claims of Notes to
Consolidated Financial Statements for more information.

On March 1, 2007, a pro se lawsuit was filed in the
Northern District of California by two alleged Rambus
shareholders against Rambus, certain current and former
executives and board members and PricewaterhouseCoopers LLP
(Kelley et al. v. Rambus, Inc. et al. C-07-01238-JF
(N.D. Cal.)). This action was consolidated with a substantially
identical pro se lawsuit filed by another purported Rambus
shareholder against the same parties. The consolidated complaint
against Rambus alleges violations of federal and state
securities laws, and state law claims for fraud and breach of
fiduciary duty. Rambus and the other defendants have filed
motions to dismiss the consolidated complaint and a hearing on
these motions is scheduled for March 14, 2008.

The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates, including those related to
revenue recognition, investments, income taxes, litigation and
other contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.

We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.

Our revenue recognition policy is based on the American
Institute of Certified Public Accountants Statement of Position
(SOP)
97-2,
Software Revenue Recognition as amended by
SOP 98-4
and
SOP 98-9.
For certain of our revenue contracts, revenue is recognized
according to
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.

In application of the specific authoritative literature cited
above, we comply with Financial Accounting Standards Board
Statement of Financial Accounting Concepts No. 5 and 6. We
recognize revenue when persuasive evidence of an arrangement
exists, we have delivered the product or performed the service,
the fee is fixed or determinable and collection is reasonably
assured. If any of these criteria are not met, we defer
recognizing the revenue until such time as all criteria are met.
Determination of whether or not these criteria have been met may
require us to make judgments, assumptions and estimates based
upon current information and historical experience.

Our revenues consist of royalty revenues and contract revenues
generated from agreements with semiconductor companies, system
companies and certain reseller arrangements. Royalty revenues
consist of patent license royalties and product license
royalties. Contract revenues consist of fixed license fees,
fixed engineering fees and service fees associated with
integration of our chip interface products into our
customers products. Contract revenues may also include
support or maintenance. Reseller arrangements generally provide
for the pass-through of a percentage of the fees paid to the
reseller by its customer for use of our patent and product
licenses. We do not recognize revenue for these arrangements
until we have received notice of revenue earned by and paid to
the reseller, accompanied by the pass-through payment from the
reseller. We do not pay commissions to the reseller for these
arrangements.

Many of our licensees have the right to cancel their licenses.
In such arrangements, revenue is only recognized to the extent
that is consistent with the cancellation provisions.
Cancellation provisions within such contracts generally provide
for a prospective cancellation with no refund of fees already
remitted by customers for products provided and payment for
services rendered prior to the date of cancellation. Unbilled
receivables represent enforceable claims and are deemed
collectible in connection with our revenue recognition policy.

We recognize royalty revenues upon notification by our licensees
and when payments are received. The terms of the royalty
agreements generally either require licensees to give us
notification and to pay the royalties within 60 days of the
end of the quarter during which the sales occur or are based on
a fixed royalty that is due within 45 days of the end of
the quarter. From time to time, we engage accounting firms other
than our independent registered public accounting firm to
perform, on our behalf, periodic audits of some of the
licensees reports of royalties to us and any adjustment
resulting from such royalty audits is recorded in the period
such adjustment is determined. We have two types of royalty
revenues: (1) patent license royalties and (2) product
license royalties.

Patent licenses. We license our broad
portfolio of patented inventions to semiconductor and systems
companies who use these inventions in the development and
manufacture of their own products. Such licensing agreements may
cover the license of part, or all, of our patent portfolio. We
generally recognize revenue from these arrangements as amounts
become due and payment is received. The contractual terms of the
agreements generally provide for payments over an extended
period of time.

Product licenses. We develop proprietary and
industry-standard chip interface products, such as RDRAM and XDR
that we provide to our customers under product license
agreements. These arrangements include royalties, which can be
based on either a percentage of sales or number of units sold.
We recognize revenue from these arrangements upon notification
from the licensee and when payments are received.

On February 2, 2007, the Federal Trade Commission (the
FTC) issued an order requiring us to limit the
royalty rates charged for certain SDR and DDR SDRAM memory and
controller products sold after April 12, 2007. The FTC
stayed this requirement on March 16, 2007, subject to
certain conditions. One such condition of the stay limits the
royalties we can receive under certain contracts so that they do
not exceed the FTCs Maximum Allowable

Royalties (MAR). We are using our best efforts to
comply with these orders. Amounts in excess of MAR that are
subject to the order are excluded from revenue. To date, such
amounts have not been significant. Depending on the final
resolution of the appeal, we may or may not be able to recognize
any excess amounts as additional revenue.

We generally recognize revenue in accordance with the provisions
of
SOP 81-1
for development contracts related to licenses of our chip
interface products, such as XDR and FlexIO that involve
significant engineering and integration services. Revenues
derived from such license and engineering services may be
recognized using the completed contract or
percentage-of-completion method. For all license and service
agreements accounted for using the percentage-of-completion
method, we determine progress to completion using input measures
based upon
labor-hours
incurred. We have evaluated use of output measures versus input
measures and have determined that our output is not sufficiently
uniform with respect to cost, time and effort per unit of output
to use output measures as a measure of progress to completion.
Part of these contract fees may be due upon the achievement of
certain milestones, such as provision of certain deliverables by
us or production of chips by the licensee. The remaining fees
may be due on pre-determined dates and include significant
up-front fees.

A provision for estimated losses on fixed price contracts is
made, if necessary, in the period in which the loss becomes
probable and can be reasonably estimated. If we determine that
it is necessary to revise the estimates of the work required to
complete a contract, the total amount of revenue recognized over
the life of the contract would not be affected. However, to the
extent the new assumptions regarding the total amount of work
necessary to complete a project were less than the original
assumptions, the contract fees would be recognized sooner than
originally expected. Conversely, if the newly estimated total
amount of work necessary to complete a project was longer than
the original assumptions, the contract fees will be recognized
over a longer period. If there is significant uncertainty about
the time to complete, or the deliverables by either party, we
evaluate the appropriateness of applying the completed contract
method of accounting under
SOP 81-1.
Such evaluation is completed by us on a
contract-by-contract
basis. For all contracts where revenue recognition must be
delayed until the contract deliverables are substantially
complete, we evaluate the realizability of the assets which the
accumulated costs would represent and defer or expense as
incurred based upon the conclusions of our realization analysis.

If application of the percentage-of-completion method results in
recognizable revenue prior to an invoicing event under a
customer contract, we will recognize the revenue and record an
unbilled receivable. Amounts invoiced to our customers in excess
of recognizable revenues are recorded as deferred revenues. The
timing and amounts invoiced to customers can vary significantly
depending on specific contract terms and can therefore have a
significant impact on deferred revenues or unbilled receivables
in any given period.

We also recognize revenue in accordance with
SOP 97-2,SOP 98-4
and
SOP 98-9
for development contracts related to licenses of our chip
interface products that involve non-essential engineering
services and post contract support (PCS). These SOPs
apply to all entities that earn revenue on products containing
software, where software is not incidental to the product as a
whole. Contract fees for the products and services provided
under these arrangements are comprised of license fees and
engineering service fees which are not essential to the
functionality of the product. Our rates for PCS and for
engineering services are specific to each development contract
and not standardized in terms of rates or length. Because of
these characteristics, we do not have a sufficient population of
contracts from which to derive vendor specific objective
evidence.

Therefore, as required by
SOP 97-2,
after we deliver the product, if the only undelivered element is
PCS, we will recognize revenue ratably over either the
contractual PCS period or the period during which PCS is
expected to be provided. We review assumptions regarding the PCS
periods on a regular basis. If we determine that it is necessary
to revise the estimates of the support periods, the total amount
of revenue to be recognized over the life of the contract would
not be affected. However, if the new estimated periods were
shorter than the original assumptions, the contract fees would
be recognized ratably over a shorter period. Conversely, if the
new estimated periods were longer than the original assumptions,
the contract fees would be recognized ratably over a longer
period.

We are involved in certain legal proceedings, as discussed in
Note 16, Litigation and Asserted Claims of
Notes to Consolidated Financial Statements of this
Form 10-K.
Based upon consultation with outside counsel handling our
defense in these matters and an analysis of potential results,
we accrue for losses related to litigation if we determine that
a loss is probable and can be reasonably estimated. If a
specific loss amount cannot be estimated, we review the range of
possible outcomes and accrue the low end of the range of
estimates. Any such accrual would be charged to expense in the
appropriate period. We recognize litigation expenses in the
period in which the litigation services were provided.

As part of preparing our consolidated financial statements, we
are required to calculate the income tax expense or benefit
which relates to the pretax income or loss for the period. In
addition, we are required to assess the realization of the tax
asset or liability to be included on the consolidated balance
sheet as of the reporting dates.

This process requires us to calculate various items including
permanent and temporary differences between the financial
accounting and tax treatment of certain income and expense
items, differences between federal and state tax treatment of
these items, the amount of taxable income reported to various
states, foreign taxes and tax credits. The differing treatment
of certain items for tax and accounting purposes results in
deferred tax assets and liabilities, which are included on our
consolidated balance sheet.

As a result of the adoption of FIN 48 on January 1,
2007, our unrecognized tax benefits decreased by
$0.3 million, of which $0.1 million was accounted for
as a decrease to the opening balance of accumulated deficit and
$0.2 million was accounted for as an increase in additional
paid in capital. In addition, $2.7 million of unrecognized
tax benefits were reclassified from long-term deferred tax
assets to long-term taxes payable. The application of income tax
law is inherently complex. Tax laws and regulations are at times
ambiguous, and interpretations of and guidance regarding income
tax laws and regulations change over time. This requires us to
make many subjective assumptions and judgments regarding our
income tax exposure. Changes in our assumptions and judgments
can materially affect our consolidated balance sheets,
statements of operations and statements of cash flows.

At December 31, 2007, our consolidated balance sheets
included net deferred tax assets of approximately
$127.8 million, consisting of a combination of
U.S. and
non-U.S. tax
benefits for: (a) items which have been recognized for
financial reporting purposes, but which will be deducted on tax
returns to be filed in the future, and (b) loss and tax
credit carryforwards. We have performed the required assessment
of positive and negative evidence regarding the realization of
the net deferred tax assets in accordance with
SFAS No. 109, Accounting for Income Taxes.
This assessment included the evaluation of scheduled reversals
of temporary book/tax differences, estimates of projected future
taxable income and tax-planning strategies. Although realization
is not assured, based on our assessment, we have concluded that
it is more likely than not that such assets will be realized.

Of the $127.8 million of deferred tax assets at
December 31, 2007, approximately $19.4 million relate
to net operating loss carryforwards that start expiring in 2014,
and approximately $28.8 million relate to tax credit
carryforwards, of which $0.5 million will start expiring in
2008 and the remaining will start expiring in 2012. The
remaining net deferred tax assets comprise the following
deductible temporary differences:



Deferred revenue of $0.2 million, which are expected to
reverse in the next year.



Depreciation and amortization of $19.0 million, which are
expected to reverse over the next 5 years.



Other liabilities and reserves of $12.4 million, which are
expected to reverse over the next 3 years



Stock-based compensation of $48.0 million, which are
expected to reverse over the next 6 years.

We expect to realize the benefit of our net deferred tax assets
from future earnings. Therefore, the realization of our net
deferred tax assets is solely dependent on our ability to
generate sufficient future taxable income during periods before
the expiration of our tax attributes. The minimum amount of
domestic future taxable income that would have to be generated
to realize our deferred tax assets is approximately
$310 million. Our forecast of

domestic income indicates it is more likely than not that the
future results of operations will generate sufficient taxable
income to realize our deferred tax assets. This forecast is
highly influenced by, among other factors, assumptions regarding
1) our ability to achieve our forecasted revenues,
2) our ability to effectively manage our expenses in line
with our forecasted revenues, 3) the impact of intellectual
property and other litigation, and 4) general trends in the
semiconductor industry worldwide.

Our forecast of income is based on assumptions about current
trends in our operations and future litigation outcomes or
expected settlements, and there can be no assurance that such
results will be achieved. We review such forecasts in comparison
with actual results and expected trends quarterly for purpose of
our realizability assessment. As a result of this review, if we
determine that we have insufficient future taxable income to
fully realize our net deferred tax assets, we will record a
valuation allowance by a charge to income tax expense in the
period such determination is made.

Prior to January 1, 2006, we accounted for stock-based
awards and our Employee Stock Purchase Plan using the intrinsic
method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees,
FIN 44, Accounting for Certain Transactions
Involving Stock-Based Compensation, an Interpretation of APB
Opinion No. 25, FASB Technical Bulletin
(FTB)
No. 97-1,Accounting under Statement 123 for Certain Employee
Stock Purchase Plans with a Look-Back Option, and
related interpretations and provided the required pro forma
disclosures of SFAS No. 123 Accounting for
Stock-Based Compensation. In accordance with APB
No. 25, a non-cash, stock-based compensation expense was
recognized for any options for which the exercise price was
below the market price on the actual grant date and for any
grants that were modified from their original terms. The charge
for the options with an exercise price below the market price on
the actual grant date was equal to the number of options
multiplied by the difference between the exercise price and the
market price of the option shares on the actual grant date. That
expense was amortized over the vesting period of the options.
The charge for modifications of options in general was equal to
the number of options modified multiplied by the difference
between the market price of the options on the modification date
and the grant price. The charge for modified options was taken
over the remaining service period, if any.

Effective January 1, 2006, we adopted
SFAS No. 123(R), which requires the measurement at
fair value and recognition of compensation expense for all
stock-based payment awards. We selected the modified prospective
method of adoption which recognizes compensation expense for the
fair value of all stock-based payments granted after
January 1, 2006 and for the fair value of all awards
granted to employees prior to January 1, 2006 that remain
unvested on the date of adoption. We use the
Black-Scholes-Merton (BSM) option pricing model to
estimate the fair value of our stock option and Employee Stock
Purchase Plan (ESPP) awards consistent with the
provisions of SFAS No. 123(R). The BSM option-pricing
model requires the estimation of highly complex and subjective
variables. These variables include expected volatility, expected
life of the award, expected dividend rate and expected risk-free
rate of return. The assumptions for expected volatility and
expected life are the two assumptions that most significantly
affect the grant date fair value. The expected stock price
volatility assumption was determined using the implied
volatility of our Common Stock. We use implied volatility for
both our stock options and ESPP shares based on freely traded
options in the open market, as we believe implied volatility is
more reflective of market conditions and a better indicator of
expected volatility than historical or blended volatility. If
there is not sufficient volume in our market traded options for
any period, we will use an equally weighted blend of historical
and implied volatility. The expected term assumption for our
stock option grants was determined using a Monte Carlo
simulation model which projects future option holder behavior
patterns based upon actual historical option exercises.
SFAS No. 123(R) also requires the application of a
forfeiture rate to the calculated fair value of stock options on
a prospective basis. Our assumption of forfeiture rate
represents the historical rate at which our stock-based awards
were surrendered prior to vesting over the trailing four years.
If our assumption of forfeiture rate changes, we would have to
make a cumulative adjustment in the current period. We monitor
the assumptions used to compute the fair value of our stock
options and ESPP awards on a regular basis and we will revise
our assumptions as appropriate. In the event that assumptions
used to compute the fair value of these awards are later
determined to be inaccurate or if we change our assumptions
significantly in future periods, stock-based compensation
expense and our results of operations could be materially
impacted. See Note 2 Summary of Significant
Accounting

See Note 2, Summary of Significant Accounting
Policies of Notes to Consolidated Financial Statements for
a full description of recent accounting pronouncements including
the respective expected dates of adoption.

Item 7A.

Quantitative
and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, primarily arising from
the effect of interest rate fluctuations on our investment
portfolio. Interest rate fluctuation may arise from changes in
the markets view of the quality of the security issuer,
the overall economic outlook, and the time to maturity of our
portfolio. We mitigate this risk by investing only in high
quality, highly liquid instruments. Securities with original
maturities of one year or less must be rated by two of the three
industry standard rating agencies as follows: A1 by
Standard & Poors, P1 by Moodys
and/or F-1
by Fitch. Securities with original maturities of greater than
one year must be rated by two of the following industry standard
rating agencies as follows: AA- by Standard &
Poors, Aa3 by Moodys
and/or AA-
by Fitch. By corporate policy, we limit the amount of our credit
exposure to $10.0 million for any one commercial issuer.
Our policy requires that at least 10% of the portfolio be in
securities with a maturity of 90 days or less. In addition,
we may make investments in securities with maturities up to
36 months. However, the bias of our investment policy is
toward shorter maturities.

We invest our cash equivalents and short-term marketable
securities in a variety of U.S. dollar financial
instruments such as Treasuries, Government Agencies,
Repurchase Agreements, Commercial Paper and Bankers
Acceptance. Our policy specifically prohibits trading
securities for the sole purposes of realizing trading profits.
However, we may liquidate a portion of our portfolio if we
experience unforeseen liquidity requirements. In such a case if
the environment has been one of rising interest rates we may
experience a realized loss, similarly, if the environment has
been one of declining interest rates we may experience a
realized gain. As of December 31, 2007, we had an
investment portfolio of fixed income marketable securities of
$321.5 million excluding cash and cash equivalents. If
market interest rates were to increase immediately and uniformly
by 10% from the levels as of December 31, 2007, the fair
value of the portfolio would decline by approximately
$1.3 million. Actual results may differ materially from
this sensitivity analysis.

We bill our customers in U.S. dollars. Although the
fluctuation of currency exchange rates may impact our customers,
and thus indirectly impact us, we do not attempt to hedge this
indirect and speculative risk. Our overseas operations consist
primarily of business development offices of from 3 to
11 people in any one country and one design center in
India. We monitor our foreign currency exposure; however, as of
December 31, 2007, we believe our foreign currency exposure
is not material enough to warrant foreign currency hedging.

The table below summarizes the book value, fair value,
unrealized gains (losses) and related weighted average interest
rates for our marketable securities portfolio as of
December 31, 2007 and 2006:

Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an
evaluation of the effectiveness of our disclosure controls and
procedures, as such terms are defined in
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act), as of December 31,
2007, the end of the period covered by this Annual Report on
Form 10-K.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed,
summarized and reported on a timely basis and that such
information is accumulated and communicated to management,
including our CEO and CFO. To the extent that components of our
internal control over financial reporting are included within
our disclosure controls and procedures, they are included in the
scope of managements annual assessment of our internal
control over financial reporting.

Based on this evaluation, our management, including our CEO and
CFO, has concluded that our disclosure controls and procedures
were not effective as of December 31, 2007 because of the
material weakness in our internal control over financial
reporting discussed below. Notwithstanding the material weakness
described below, our management performed additional analyses,
reconciliations and other post-closing procedures and has
concluded that the Companys consolidated financial
statements for the periods covered by and included in this
Annual Report on
Form 10-K
are fairly stated in all material respects in accordance with
generally accepted accounting principles in the U.S. for
each of the periods presented herein.

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our management, including the CEO and
CFO conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2007
using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and
that receipts and

expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on its financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
Management has determined that we have the following material
weakness in our internal control over financial reporting as of
December 31, 2007.

Insufficient personnel with appropriate accounting knowledge
and training. We did not maintain a sufficient
complement of personnel with an appropriate level of accounting
knowledge, experience and training in the application of
generally accepted accounting principles commensurate with our
financial reporting requirements. Specifically, this deficiency
resulted in audit adjustments that corrected an understatement
of revenue and audit adjustments to deferred revenue, deferred
rent, property and equipment, depreciation, consulting expenses
and certain accrual accounts and disclosures in the consolidated
financial statements for the year ended December 31, 2006
and in an audit adjustment that corrected an understatement of
operating expenses and related legal accrual accounts and
disclosures in the consolidated financial statements for the
year ended December 31, 2007, primarily arising from an
insufficient review by us of relevant information obtained
through communications with third parties. Additionally, this
deficiency could result in misstatements of the aforementioned
accounts and disclosures that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management has determined this control deficiency constitutes a
material weakness.

Based on the above described material weakness, our management,
including our CEO and CFO have concluded that we did not
maintain effective internal control over financial reporting as
of December 31, 2007, based on the criteria in Internal
Control-Integrated Framework issued by the COSO.

The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.

In response to the identification of the material weakness
described above, management has initiated the following
corrective actions:



During the quarter ended December 31, 2007, we hired a new
VP of Finance, with experience in public accounting as well as
in senior accounting roles in a public company, who will oversee
all of our accounting functions.



During the quarter ended December 31, 2007 and prior to
filing the financial statements, we have also hired two
Assistant Corporate Controllers; one to oversee revenue
recognition and financial systems and the other to oversee
external reporting. We have also hired a General Ledger and
Consolidations Manager.



During the quarter ended December 31, 2007, we required all
of our finance, accounting and stock administration staff to
attend training in various areas of U.S. generally accepted
accounting principles. In this regard, members of our finance,
accounting and operations departments have attended revenue
recognition, SEC reporting and stock administration training in
the fourth quarter of 2007.



We have on-going efforts to improve communications between
finance personnel responsible for completing reviews of our
accrual accounts and operations personnel responsible for the
execution of the work on those transactions and have instituted
quarterly close meetings involving finance and operations
personnel; and

We will continue our efforts to review our internal control over
financial reporting with the intent to automate previously
manual processes specifically in the areas of legal billing
administration.

Additionally, management is investing in on-going efforts to
continuously improve the control environment and has committed
considerable resources to the continuous improvement of the
design, implementation, documentation, testing and monitoring of
our internal controls.

There have been changes in our internal control over financial
reporting during the most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting as
described above in the section, Implemented or Planned
Remedial Actions of the Material Weakness.

The information responsive to this item is incorporated herein
by reference to our Proxy Statement for our 2008 annual meeting
of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K.
The information under the heading Our Executive
Officers in Part I, Item 1 of this Annual Report
on
Form 10-K
is also incorporated herein by reference.

We have a Code of Business Conduct and Ethics for all of our
directors, officers and employees. Our Code of Business Conduct
and Ethics is available on our website at
http://investor.rambus.com/governance/ethics.cfm /. To date,
there have been no waivers under our Code of Business Conduct
and Ethics. We will post any waivers, if and when granted, of
our Code of Business Conduct and Ethics on our website.

Item 11.

Executive
Compensation

The information responsive to this item is incorporated herein
by reference to our Proxy Statement for our 2008 annual meeting
of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K.

The information responsive to this item is incorporated herein
by reference to our Proxy Statement for our 2008 annual meeting
of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K.

The information responsive to this item is incorporated herein
by reference to our Proxy Statement for our 2008 annual meeting
of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K.

Item 14.

Principal
Accountant Fees and Services

The information responsive to this item is incorporated herein
by reference to our Proxy Statement for our 2008 annual meeting
of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K.

In our opinion, the consolidated financial statements listed in
the index appearing under Item 15 (a)(1) present fairly, in
all material respects, the financial position of Rambus Inc. and
its subsidiaries at December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company did
not maintain, in all material respects, effective internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) because a
material weakness in internal control over financial reporting
related to insufficient personnel with appropriate accounting
knowledge and training existed as of that date. A material
weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or
detected on a timely basis. The material weakness referred to
above is described in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A.
We considered this material weakness in determining the nature,
timing, and extent of audit tests applied in our audit of the
2007 consolidated financial statements, and our opinion
regarding the effectiveness of the Companys internal
control over financial reporting does not affect our opinion on
those consolidated financial statements. The Companys
management is responsible for these financial statements, for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting included in managements report
referred to above. Our responsibility is to express opinions on
these financial statements and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.

As discussed in Note 10 of the Notes to the Consolidated
Financial Statements, effective January 1, 2007, the
Company changed the manner in which it accounts for uncertainty
in income taxes.

As discussed in Note 2 of the Notes to the Consolidated
Financial Statements, effective January 1, 2006, the
Company changed the manner in which it accounts for stock-based
compensation.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

Rambus Inc. (the Company or Rambus)
designs, develops and licenses chip interface technologies that
are foundational to nearly all digital electronics products.
Rambus chip interface technologies are designed to improve
the time-to-market, performance, and cost-effectiveness of its
customers semiconductor and system products for computing,
communications and consumer electronics applications. Rambus was
incorporated in California in March 1990 and reincorporated in
Delaware in March 1997.

We have reclassified certain prior year balances to conform to
the current years presentation. None of these
reclassifications had an impact on reported net income (loss)
for any of the periods presented. See Note 2, Summary
of Significant Accounting Policies, for adoption of FASB
Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109, Accounting
for Income Taxes.

The accompanying consolidated financial statements include the
accounts of Rambus and its wholly owned subsidiaries, Rambus
K.K., located in Tokyo, Japan and Rambus, located in George
Town, Grand Caymans, BWI, of which Rambus Chip Technologies
(India) Private Limited, Rambus Deutschland GmbH, located in
Pforzheim, Germany and Rambus Korea, Inc., located in Seoul,
Korea are subsidiaries. All intercompany accounts and
transactions have been eliminated in the accompanying
consolidated financial statements. Investments in entities with
less than 20% ownership by Rambus and in which Rambus does not
have the ability to significantly influence the operations of
the investee are accounted for using the cost method and are
included in other assets.

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Rambus revenue recognition policy is based on the American
Institute of Certified Public Accountants Statement of Position
(SOP)
97-2,
Software Revenue Recognition as amended by
SOP 98-4
and
SOP 98-9.
For certain of Rambus revenue contracts, revenue is
recognized according to
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.

In application of the specific authoritative literature cited
above, Rambus complies with Financial Accounting Standards Board
Statement of Financial Accounting Concepts No. 5 and 6.
Rambus recognizes revenue when persuasive evidence of an
arrangement exists, Rambus has delivered the product or
performed the service, the fee is fixed or determinable and
collection is reasonably assured. If any of these criteria are
not met, Rambus defers recognizing the revenue until such time
as all criteria are met. Determination of whether or not these
criteria have been met may require the Company to make
judgments, assumptions and estimates based upon current
information and historical experience.

Rambus revenues consist of royalty revenues and contract
revenues generated from agreements with semiconductor companies,
system companies and certain reseller arrangements. Royalty
revenues consist of patent license royalties and product license
royalties. Contract revenues consist of fixed license fees,
fixed engineering fees and service fees associated with
integration of Rambus chip interface products into its
customers products. Contract revenues may also include
support or maintenance. Reseller arrangements generally provide
for

the pass-through of a percentage of the fees paid to the
reseller by its customer for use of Rambus patent and
product licenses. Rambus does not recognize revenue for these
arrangements until it has received notice of revenue earned by
and paid to the reseller, accompanied by the pass-through
payment from the reseller. Rambus does not pay commissions to
the reseller for these arrangements.

Many of Rambus licensees have the right to cancel their
licenses. In such arrangements, revenue is only recognized to
the extent that is consistent with the cancellation provisions.
Cancellation provisions within such contracts generally provide
for a prospective cancellation with no refund of fees already
remitted by customers for products provided and payment for
services rendered prior to the date of cancellation. Unbilled
receivables represent enforceable claims and are deemed
collectible in connection with the Companys revenue
recognition policy.

Rambus recognizes royalty revenues upon notification by its
licensees and when payments are received. The terms of the
royalty agreements generally either require licensees to give
Rambus notification and to pay the royalties within 60 days
of the end of the quarter during which the sales occur or are
based on a fixed royalty that is due within 45 days of the
end of the quarter. From time to time, Rambus engages accounting
firms other than its independent registered public accounting
firm to perform, on Rambus behalf, periodic audits of some
of the licensees reports of royalties to Rambus and any
adjustment resulting from such royalty audits is recorded in the
period such adjustment is determined. Rambus has two types of
royalty revenues: (1) patent license royalties and
(2) product license royalties.

Patent licenses. Rambus licenses its broad
portfolio of patented inventions to semiconductor and systems
companies who use these inventions in the development and
manufacture of their own products. Such licensing agreements may
cover the license of part, or all, of Rambus patent
portfolio. Rambus generally recognizes revenue from these
arrangements as amounts become due and payments are received.
The contractual terms of the agreements generally provide for
payments over an extended period of time.

Product licenses. Rambus develops proprietary
and industry-standard chip interface products, such as RDRAM and
XDR that Rambus provides to its customers under product license
agreements. These arrangements include royalties, which can be
based on either a percentage of sales or number of units sold.
Rambus recognizes revenue from these arrangements upon
notification from the licensee and when payments are received.

On February 2, 2007, the Federal Trade Commission (the
FTC) issued an order requiring Rambus to limit the
royalty rates charged for certain SDR and DDR SDRAM memory and
controller products sold after April 12, 2007. The FTC
stayed this requirement on March 16, 2007, subject to
certain conditions. One such condition of the stay limits the
royalties Rambus can receive under certain contracts so that
they do not exceed the FTCs Maximum Allowable Royalties
(MAR). The Company is using its best efforts to
comply with these orders. Amounts in excess of MAR that are
subject to the order are excluded from revenue. As of
December 31, 2007, $2.4 million has been excluded from
revenue. Depending on the final resolution of the appeal, the
Company may or may not be able to recognize any excess amounts
as additional revenue.

Rambus generally recognizes revenue in accordance with the
provisions of
SOP 81-1
for development contracts related to licenses of its chip
interface products, such as XDR and FlexIO that involve
significant engineering and integration services. Revenues
derived from such license and engineering services may be
recognized using the completed contract or
percentage-of-completion method. For all license and service
agreements accounted for using the percentage-of-completion
method, Rambus determines progress to completion using input
measures based upon
labor-hours
incurred. Rambus has evaluated use of output measures versus
input measures and has determined that its output is not
sufficiently uniform with respect to cost, time and effort per
unit

of output to use output measures as a measure of progress to
completion. Part of these contract fees may be due upon the
achievement of certain milestones, such as provision of certain
deliverables by Rambus or production of chips by the licensee.
The remaining fees may be due on pre-determined dates and
include significant up-front fees.

A provision for estimated losses on fixed price contracts is
made, if necessary, in the period in which the loss becomes
probable and can be reasonably estimated. If Rambus determines
that it is necessary to revise the estimates of the work
required to complete a contract, the total amount of revenue
recognized over the life of the contract would not be affected.
However, to the extent the new assumptions regarding the total
amount of work necessary to complete a project were less than
the original assumptions, the contract fees would be recognized
sooner than originally expected. Conversely, if the newly
estimated total amount of work necessary to complete a project
was longer than the original assumptions, the contract fees will
be recognized over a longer period. If there is significant
uncertainty about the time to complete, or the deliverables by
either party, Rambus evaluates the appropriateness of applying
the completed contract method of accounting under
SOP 81-1.
Such evaluation is completed by Rambus on a
contract-by-contract
basis. For all contracts where revenue recognition must be
delayed until the contract deliverables are substantially
complete, Rambus evaluates the realizability of the assets which
the accumulated costs would represent and defers or expenses as
incurred based upon the conclusions of its realization analysis.

If application of the percentage-of-completion method results in
recognizable revenue prior to an invoicing event under a
customer contract, the Company will recognize the revenue and
record an unbilled receivable. Amounts invoiced to Rambus
customers in excess of recognizable revenues are recorded as
deferred revenues. The timing and amounts invoiced to customers
can vary significantly depending on specific contract terms and
can therefore have a significant impact on deferred revenues or
unbilled receivables in any given period.

Rambus also recognizes revenue in accordance with
SOP 97-2,SOP 98-4
and
SOP 98-9
for development contracts related to licenses of its chip
interface products that involve non-essential engineering
services and post contract support (PCS). These SOPs
apply to all entities that earn revenue on products containing
software, where software is not incidental to the product as a
whole. Contract fees for the products and services provided
under these arrangements are comprised of license fees and
engineering service fees which are not essential to the
functionality of the product. Rambus rates for PCS and for
engineering services are specific to each development contract
and not standardized in terms of rates or length. Because of
these characteristics, the Company does not have a sufficient
population of contracts from which to derive vendor specific
objective evidence.

Therefore, as required by
SOP 97-2,
after Rambus delivers the product, if the only undelivered
element is PCS, Rambus will recognize revenue ratably over
either the contractual PCS period or the period during which PCS
is expected to be provided. Rambus reviews assumptions regarding
the PCS periods on a regular basis. If Rambus determines that it
is necessary to revise the estimates of the support periods, the
total amount of revenue to be recognized over the life of the
contract would not be affected. However, if the new estimated
periods were shorter than the original assumptions, the contract
fees would be recognized ratably over a shorter period.
Conversely, if the new estimated periods were longer than the
original assumptions, the contract fees would be recognized
ratably over a longer period.

Rambus allowance for doubtful accounts is determined using
a combination of factors to ensure that Rambus trade and
unbilled receivables balances are not overstated due to
uncollectibility. The Company performs ongoing customer credit
evaluation within the context of the industry in which it
operates, does not require collateral, and maintains allowances
for potential credit losses on customer accounts when deemed
necessary. A specific allowance for a doubtful account up to
100% of the invoice will be provided for any problematic
customer balances. Delinquent account balances are written-off
after management has determined that the likelihood of
collection is not possible. For all periods presented, Rambus
had no allowance for doubtful accounts.

Costs incurred in research and development, which include
engineering expenses, such as salaries and related benefits,
depreciation, professional services and overhead expenses
related to the general development of Rambus products, are
expensed as incurred. Software development costs are capitalized
beginning when a products technological feasibility has
been established and ending when a product is available for
general release to customers. Rambus has not capitalized any
software development costs since the period between establishing
technological feasibility and general customer release is
relatively short and as such, these costs have not been
significant.

Income taxes are accounted for using an asset and liability
approach, which requires the recognition of deferred tax assets
and liabilities for expected future tax events that have been
recognized differently in Rambus consolidated financial
statements and tax returns. The measurement of current and
deferred tax assets and liabilities is based on provisions of
the enacted tax law and the effects of future changes in tax
laws and rates. A valuation allowance is established when
necessary to reduce deferred tax assets to amounts expected to
be realized.

In addition, the calculation of the Companys tax
liabilities involves dealing with uncertainties in the
application of complex tax regulations. Effective
January 1, 2007, the Company adopted the provisions of
FIN 48. The Company considers many factors when evaluating
and estimating its tax positions and tax benefits, which may
require periodic adjustments and which may not accurately
anticipate actual outcomes. See Note 10, Income
Taxes, for additional information regarding the adoption
of FIN 48.

For the years ended December 31, 2007, 2006 and 2005, the
Company maintained stock plans covering a broad range of
potential equity grants including stock options, restricted
stock, performance stock and stock units. In addition, the
Company sponsors Employee Stock Purchase Plans
(ESPP), whereby eligible employees are entitled to
purchase Common Stock semi-annually, by means of limited payroll
deductions, at a 15% discount from the fair market value of the
Common Stock as of specific dates. See Note 7,
Employee Stock Option Plans, of Notes to
Consolidated Financial Statements for a detailed description of
the Companys plans.

Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123 Accounting for
Stock-Based Compensation. SFAS No. 123(R)
requires the measurement and recognition of compensation expense
in the Companys statement of operations for all
share-based payment awards made to Rambus employees, directors
and consultants including employee stock options, nonvested
equity stock and equity stock units, and employee stock
purchases related to all Rambus stock-based compensation
plans. Stock-based compensation expense is measured at grant
date, based on the estimated fair value of the award, reduced by
an estimate of the annualized rate of stock option forfeitures,
and is recognized as expense over the employees expected
requisite service period, using the straight-line method. In
addition, SFAS No. 123(R) requires the benefits of tax
deductions in excess of recognized compensation expense to be
reported as a financing cash flow, rather than as an operating
cash flow as prescribed under previous accounting rules. The
Company selected the modified prospective method of adoption,
which recognizes compensation expense for the fair value of all
share-based payments granted after January 1, 2006 and for
the fair value of all awards granted to employees prior to
January 1, 2006 that remain unvested on the date of
adoption. This method does not require a restatement of prior
periods. However, awards granted and still unvested on the date
of adoption will be attributed to expense under
SFAS No. 123(R), including the application of
forfeiture rate on a prospective basis. Rambus forfeiture
rate represents the historical rate at which Rambus stock-based
awards were surrendered prior to vesting over the trailing four
years. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised on a cumulative
basis, if necessary, in subsequent periods if actual

Prior to January 1, 2006, the Company accounted for
employee stock-based awards and its ESPP using the intrinsic
value method in accordance with APB No. 25, FIN 44,
Accounting for Certain Transactions Involving Stock-Based
Compensation, an Interpretation of APB Opinion
No. 25, FASB Technical Bulletin (FTB)
No. 97-1,
Accounting under Statement 123 for Certain Employee Stock
Purchase Plans with a Look-Back Option, and related
interpretations. The Company accounted for non-employee
stock-based awards under the fair value method in accordance
with Emerging Issues Task Force (EITF)
No. 96-18
Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Under the intrinsic value
method, stock-based compensation expense for options has been
recognized in the Companys Consolidated Statement of
Operations only if the exercise price of the Companys
stock options granted to employees and directors was less than
the fair market value of the underlying stock at the date of
grant and shares granted under the ESPP were not issued at
greater than a 15% discount.

Had stock-based compensation for 2005 been determined based on
the estimated fair value at the grant date for all equity awards
consistent with the provisions of SFAS No. 123, the
Companys net income and earnings per share for the year
ended December 31, 2005 would have been adjusted to the
following pro forma amounts:

Effective January 1, 2006, Rambus adopted
SFAS No. 123(R), which requires the measurement and
recognition of compensation expense in the Companys
statement of operations for all share-based payment awards made
to Rambus employees and directors, including employee stock
options and employee stock purchases related to all Rambus
stock-based compensation plans based on estimated fair values.

SFAS No. 123(R) requires companies to estimate the
fair value of stock-based compensation on the date of grant
using an option-pricing model. The fair value of the award is
recognized as expense over the requisite service periods in
Rambus consolidated statement of operations using the
straight-line method consistent with the methodology used under
SFAS No. 123. Under SFAS No. 123(R) the
attributed stock-based compensation expense must be reduced by
an estimate of the annualized rate of stock option forfeitures.
The unrecognized expense of awards not yet vested at the date of
adoption is recognized in net income (loss) in the periods after
the date of adoption, using the same valuation method and
assumptions determined under the original provisions of
SFAS No. 123, Additionally, Rambus deferred
stock compensation balance of $20.1 million as of
December 31, 2005, which was accounted for under APB
No. 25, was reclassified into its additional paid in
capital upon the adoption of SFAS No. 123(R) on
January 1, 2006.

The following table summarizes stock-based compensation expense
related to employee stock options and employee stock purchase
grants under SFAS No. 123(R) for the years ended
December 31, 2007 and 2006:

December 31,

December 31,

2007

2006

(In thousands)

Stock-based compensation expense by type of award:

Employee stock options

$

42,320

$

38,101

Employee stock purchase plan(1)

53

1,148

Nonvested equity stock and equity stock units

2,437

1,274

Total stock-based compensation expense

44,810

40,523

Tax effect on stock-based compensation expense

17,312

15,559

Net effect of stock-based compensation expense on results of
operations

$

27,498

$

24,964

(1)

During 2007, the Company reversed approximately
$0.8 million of compensation expense related to the
employee stock purchase plan due to a change in estimate of
expected contributions.

Stock Options: During the years ended
December 31, 2007 and 2006, Rambus granted 3,202,800 and
2,397,850 stock options, respectively, with an estimated total
grant-date fair value of $39.4 million and
$42.0 million, respectively. During the years ended
December 31, 2007 and 2006, Rambus recorded stock-based
compensation related to stock options of $42.3 million and
$38.1 million, respectively, for all unvested options
granted prior and after the adoption of
SFAS No. 123(R), including the modification charge for
the extension of expiring options discussed below.

The effect of recording stock-based compensation for the year
ended December 31, 2007 includes a charge resulting from
the Companys modifying the terms of 139 stock option
grants by offering an extension of time to exercise. An
additional charge was taken during the year to extend the time
of the extension of the 59 grants previously extended in 2006.
Because the Company suspended all stock option exercises as of
July 19, 2006 in connection with the stock option
investigation, substantially all of the Companys employees
and directors whose options were expiring and terminating
employees whose remaining time to exercise vested options would
have expired were given extensions of time to exercise those
options during the period that their options approached
expiration. The total modification charge of $3.3 million
(of which $2.2 million was equity related and
$1.1 million was liability related) and $1.1 million
for the years ended December 31, 2007 and 2006,
respectively, is included in the above table under the caption
Employee stock options.

On October 22, 2007, the Company entered into a termination
agreement with John Danforth, its then senior legal advisor and
former Vice President and General Counsel. In connection with
this agreement, the Company extended Mr. Danforths
time to exercise his vested stock options by approximately
12 months. The total non-cash

compensation charge related to this extension is approximately
$0.8 million and is included in the above table under the
caption Employee stock options.

The total intrinsic value of options exercised was
$15.2 million, $110.2 million and $10.2 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. Intrinsic value is the total value of exercised
shares based on the price of the Companys common stock on
the date of exercise less the cash received from the employees
to exercise the options.

The total cash received from employees as a result of employee
stock option exercises was $11.2 million,
$55.3 million and $5.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively.

There were no tax benefits realized as a result of employee
stock option exercises, stock purchase plan purchases, and
vesting of equity stock and stock units for the years ended
December 31, 2007 and 2006 calculated in accordance with
SFAS No. 123 (R) and approximately
$0.7 million for the year ended December 31, 2005,
respectively, calculated in accordance with APB No. 25.

Employee Stock Purchase Plan: During the years
ended December 31, 2007 and 2006, Rambus recorded
stock-based compensation related to ESPP of $53,000 and
$1.1 million, respectively. Compensation expense in
connection with ESPP for the year ended December 31, 2006
includes a charge resulting from the Companys modifying
prior offerings. In accordance with the terms of the 1997
Purchase Plan, if the fair market value on any given purchase
date is less than the fair market value on the grant date, the
grant offering is cancelled and all participants are enrolled in
the next subsequent grant offering. A modification charge is
recorded as a result of this grant offering cancellation and the
issuance of a new grant offering. During the years ended
December 31, 2007 and 2006, the Company recorded
modification charges of $0.0 million and $0.2 million,
respectively, related to the 1997 Purchase Plan which is
included in the table above under the caption Employee
Stock Purchase Plan.

As of July 19, 2006, the 1997 Purchase Plan was suspended
in connection with the stock option investigation. Therefore, no
purchases were made under the 1997 Purchase Plan until the
Company became current on its filings with the Securities and
Exchange Commission on October 17, 2007. The last purchase
under the 1997 Purchase Plan was made on October 31, 2007
and the 1997 Purchase Plan was terminated pursuant to its terms.

Rambus estimates the fair value of stock options using the
Black-Scholes-Merton model (BSM). This is the same
model which it previously used in preparing its pro forma
disclosure required under SFAS No. 123. The BSM model
determines the fair value of stock-based compensation and is
affected by Rambus stock price on the date of the grant as
well as assumptions regarding a number of highly complex and
subjective variables. These variables include expected
volatility, expected life of the award, expected dividend rate,
and expected risk-free rate of return. The assumptions for
expected volatility and expected life are the two assumptions
that significantly affect the grant date fair value. The BSM
option-pricing model was developed for use in estimating the
value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because employee stock
options have certain characteristics that are significantly
different from traded options, and because changes in the
subjective assumptions can materially affect the estimated
value, if actual results differ significantly from these
estimates, stock-based compensation expense and Rambus
results of operations could be materially impacted.

The fair value of stock awards and ESPP offerings is estimated
as of the grant date using the BSM option-pricing model assuming
a dividend yield of 0% and the additional weighted-average
assumptions as listed in the following table: